Zoom Video stock is overvalued, Darren Sissons says

Is Zoom’s high valuation worth it? Not likely, says Darren Sissons of Campbell, Lee and Ross, who claims that while the company’s product has obviously found a huge opportunity in the current marketplace, Zoom’s platform won’t have the advantage forever.

Zoom Video Communications (Zoom Video Communications Stock Quote, Chart, News NASDAQ:ZM) has in many ways been the story of the pandemic, with its share price more than tripling since the COVID-19 lockdowns of March and April when everyone and their dog started using the Zoom platform to do virtually everything from carrying out business meetings to talking to Grandma to educating their children.

And the results have been speaking for themselves, with the company’s revenue climbing 355 per cent to $663.5 million in its latest quarter. Profits are rolling in, too. Zoom’s fiscal second quarter, delivered on September 1, saw the company earn $0.92 per share over the quarter ended July 31.

Those numbers handily beat analysts’ estimates while management predicted more strong growth up ahead.

“Our ability to keep people around the world connected, coupled with our strong execution, led to revenue growth of 355 per cent year-over-year in Q2 and enabled us to increase our revenue outlook to approximately $2.37 billion to $2.39 billion for FY21, or 281 per cent to 284 per cent increase year-over-year,” said Zoom founder and CEO Eric S. Yuan in a press release.

But while the good times continue for Zoom, investors should be wary about giving into their fear of missing out with the stock, says Sissons, who cautions on its high valuation.

“Zoom is a great product and obviously the demands from the telco point of view are quite heavy,” said Sissons, speaking on BNN Bloomberg on Thursday. “The challenge that I have with Zoom just generally is that right now, the valuation is extremely stretched. It’s as if there will be no other alternative or no competing product.

Using an oil analogy, the best cure for high oil prices is high oil prices because what it does is it attracts competition,” Sissons said.

“So, really, if profitability is very, very large, then we’re going to find different providers come into the space, and I’m very reticent as a long term tech investor of paying very high multiples for companies that are the first company with the market leadership position. Because, ultimately, competition erodes profit,” he said.

As the year has progressed, Zoom’s share price has essentially become a barometer for market sentiment on the pandemic, and with the current so-called second wave hitting many countries, Zoom has been lifted to new heights.

And while that volatility may be attractive to investors looking to trade a stock like Zoom, Sissons says the investment buyer shouldn’t get involved in the stock.

“From my point of view, Zoom is a trade, it’s not an own. If you’re using options that might be an option, but for us the valuation is just too, too rich. We would wouldn’t go there,” Sissons said.