Is Zoom Video Communications a Buy at All-Time Highs?

2019 has been a big year for new stocks. From discount grocery stores to meatless food to cybersecurity software, many IPOs have sparked investor interest and soared higher.

Here's another one to add to the list: Zoom Video Communications (ZM 0.05%). The company priced itself at $35 a share back in April, opened for trading at $65, and as of this writing continues to push to new highs and sits at $100. That values this internet communications company at $27 billion, quite the sum for a business less than a decade old.

Zoom isn't cheap, but as the company's name implies, sales are off to the races. Here's why it might be a buy at all-time highs -- for the right investor.

There's more where that came from

Online video-based communications aren't new, but from its inception Zoom's goal was to create a higher quality and easier-to-use video call and conferencing tool. On the surface, the cloud-based software resembles Cisco Systems' (CSCO 0.06%) WebEx or Microsoft's (MSFT 0.37%) Skype (Zoom's CEO Eric Yuan was a founding engineer at WebEx and a vice president of the segment after Cisco acquired it in 2007). But video communications aren't simple, and Yuan saw an opportunity to continuously improve upon them.

Zoom's financial results speak to the superiority of the video suite. Granted, the video communications market is expected to grow an average of 8% a year to nearly $20 billion by 2023, according to researcher Markets and Markets. IDC pegs Zoom's future addressable market much higher at $43 billion.

But Zoom is far exceeding the average growth rate. Revenue doubled year over year in its fiscal 2020 first quarter as a public company, driven by lots of new customer additions, as well as existing customers that spent more money than in the prior year (the net dollar expansion rate was over 130% for businesses with at least 10 employees).

YOY = year over year; pp = percentage point. Data source: Zoom.

In addition to its impressive growth, Zoom is also profitable. That's nearly unheard of in the world of software start-ups, especially when funneling every available dollar back into growth initiatives is the name of the game. Nevertheless, Zoom is already balancing growth with profits and reported $15.3 million in free cash flow (money left over after basic operating and capital expenses) versus negative $1.1 million the prior year.

With Zoom growing faster than a fast-growing industry, it has ample opportunity to dramatically expand over the next few years. So it makes sense that investors are piling in and running up share prices. But does it still make sense to buy in?

Image source: Getty Images.

Will the Zoom advantage continue?

With Zoom just recently entering profitable territory, it's difficult to value the business using metrics dealing with the bottom line. It isn't an accurate measure, but assuming the company's free cash flow of $15.3 million during its last quarter holds for the rest of the year, the stock trades for 450 times forward free cash flow.

Thus, shares are a growth-now, profit-later purchase, assuming that revenues will continue to go up by at least double digits for the foreseeable future (the price-to-sales ratio based on this year's revenue estimate of at least $535 million puts the stock at 50.5 times sales). As long as Zoom continues to put up strong revenue growth, share prices will continue to follow.

Zoom isn't for everyone. Shares will be volatile in the years ahead, rising and falling depending on how close sales come to meeting lofty expectations. Only investors who can build out a position over time (perhaps buying a little bit each month, quarter, etc.) and who can give Zoom at least a few years to develop should make a purchase. But for those who don't mind roller coaster rides and have the time to wait, this company is worth considering -- even at all-time highs.