The correction in technology stocks this year has put some high-flying names in a deep hole, as investors have pressed the panic button to shun richly valued companies amid rising interest rates and surging inflation to instead park their funds in safer assets.
Shares of Zoom Video Communications (ZM +2.74%) have been hit badly during the sell-off, plunging 32.5% in 2022 as compared with the Nasdaq-100 Technology Sector's smaller decline of 11%. However, the sharp drop in Zoom stock is a great buying opportunity for investors, as it has what it takes to regain its mojo in the long run and even double.
Let's look at the reasons why this tech stock could deliver eye-popping returns in the long run.
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Zoom Video Communications is built for long-term growth
Communications platform provider Zoom is coming off a solid fiscal year. The company's fiscal 2022 revenue increased 55% to $4.1 billion, while non-GAAP (adjusted) net income shot up 52% to $5.07 per share. However, the company's weaker-than-expected guidance for the current quarter and its forecast for a sharp slowdown in its revenue growth this fiscal year have given the stock a gut punch.
Zoom expects revenue to grow just 11% this year at the higher end of its guidance range of $4.53 billion to $4.55 billion, while adjusted earnings are expected to shrink to $3.48 per share at the midpoint. This indicates that Zoom's pandemic-driven surge of the past two years, which rapidly increased the adoption of the company's videoconferencing and collaboration platform, may finally be over.
Investors, however, should note that Zoom's valuation already reflects the company's new normal. The stock trades at 25 times earnings and 8.5 times sales, lower than last year's earnings multiple of 49 and price-to-sales ratio of 14. What's more, the stock's earnings multiple is lower than the Nasdaq-100's multiple of 33. Buying the stock at these multiples looks like a good idea as Zoom is sitting on a huge end-market opportunity and a massive customer base that should help the company deliver consistently strong growth over the long run.
For instance, Gartner estimates that Zoom's contact center solution, which was introduced in February 2022, has unlocked an $18 billion revenue opportunity for the company. This integrated solution gives Zoom customers access to different types of channels ranging from video to voice to messages and webchat.
Given that Zoom has nearly 510,000 customers that have more than 10 employees, it is in a strong position to drive incremental spending with the help of new product introductions. The good part is that Zoom customers are already ramping up their spending on the company's offerings. Customers with more than 10 employees generated a net dollar expansion rate of 129% over the trailing 12 months. Enterprise customers clocked a net dollar expansion rate of 130% over the same timeframe.
The increase in this metric indicates that Zoom customers are either increasing their usage of the company's services or they are adopting new products. Industry research company Global Market Insights estimates that the worldwide videoconferencing market is set to clock 23% annual growth through 2027, so it won't be surprising to see Zoom maintain such strong growth rates over the long run.
Why the stock could double
Analysts expect the company's earnings growth to accelerate over the next couple of years, as evident from the chart below.
ZM EPS Estimates for Current Fiscal Year data by YCharts
More specifically, Zoom's earnings are expected to increase just over 14% in fiscal 2024, followed by a 16.5% increase in fiscal 2025. Assuming the company maintains a 15% annual growth rate over the next five years (using fiscal 2023 as the base year), its bottom line EPS would increase to nearly $7. Zoom stock is trading at 33 times forward earnings. Assuming a similar earnings multiple after five years, it would translate into a stock price of $231 based on the projected earnings calculated above.
That would be more than double Zoom Video Communications' closing stock price of $113.93 on March 25. As a result, investors looking to buy a potential growth stock at an enticing valuation should take a closer look at Zoom since it can explode in the long run.
