Zoom Communications Inc (NASDAQ:ZM) Presents a "Decent Value" Case for Investors

A "Decent Value" screening method finds companies trading at reasonable prices while having good basic business operations. This approach tries to balance the classic value investing idea of buying assets for less than they are worth with the understanding that lasting profitability, sound finances, and potential for expansion are vital to a company's lasting achievement. By selecting for stocks with good valuation grades together with acceptable results in profitability, financial condition, and expansion, the method intends to find opportunities the market may have missed, possibly providing a safety buffer while keeping basic quality. One company that recently appeared from this screening method is Zoom Communications Inc (NASDAQ:ZM).

Valuation Metrics

The central idea of value investing is buying a security for less than its actual worth. Zoom's present valuation measurements indicate it might be trading for a lower price compared to both its industry and the wider market. For value investors, these numbers are the first step for finding a possible opportunity.

• Price-to-Earnings (P/E) Ratio: At 14.64, Zoom's P/E ratio is much lower than the S&P 500 average of 27.38. More notably, it is less expensive than about 86% of similar companies in the competitive software industry, where the average P/E is above 51.
• Price-to-Free-Cash-Flow: This measurement, which compares the price to the real cash the company produces, also shows a valuation that is appealing within its sector. Close to 90% of software companies have a higher valuation on this measure.
• Forward P/E Ratio: Considering the future, Zoom's forward P/E of 13.79 stays well below the S&P 500's average and suggests the market's conservative earnings predictions are already reflected in the price, offering a possible buffer against negative news.

A complete listing of these and other valuation measurements is available in the full fundamental analysis report.

Financial Health

A solid balance sheet is a fundamental part of a long-lasting investment, as it gives a company the strength to handle economic slowdowns and fund future expansion. Zoom shows very good financial condition, which is an important factor for value investors looking to steer clear of "value traps"—companies that are inexpensive because of fundamental financial problems.

• Debt-Free Balance Sheet: Zoom has no debt, removing interest costs and the risk of bankruptcy. This puts it in a small group within any industry and offers great operational freedom.
• High Liquidity: The company's current and quick ratios are both a solid 4.57, showing more than enough resources to meet short-term liabilities. These ratios are higher than those of about 87% of its software industry rivals.
• Altman-Z Score: With a score of 9.32, Zoom is seen as having a very small chance of financial trouble, doing better than over 83% of its industry counterparts.

Profitability

Although a low valuation is appealing, it needs to be confirmed by the capacity to make profits. A company's profitability confirms its business plan and is necessary for producing long-term value for shareholders. Zoom's profitability grades are very good, indicating its present earnings are likely to continue.

• Good Margins: The company has a profit margin of 22.31% and an operating margin of 18.13%, both of which are in the top 15% of the software industry. Its gross margin of 75.85% is also very good.
• Efficient Capital Use: Zoom's Return on Assets (9.57%) and Return on Equity (11.78%) are acceptable, showing effective use of shareholder money. These numbers are better than most industry counterparts.
• Positive Trend: Significantly, both profit and operating margins have shown good improvement in recent years, pointing to better operational effectiveness.

Growth Prospects

For a value investment idea to succeed, a company needs a realistic way to expand in the future. While Zoom's very fast growth during the pandemic has inevitably slowed, its expansion picture is still acceptable, particularly when viewed next to its valuation.

• Past Growth: Over a period of several years, Zoom has shown very good growth, with Revenue increasing at an average yearly rate of almost 50%.
• Present and Expected Growth: More recent growth has been slower, with revenue increasing 3.05% over the last year. Analyst forecasts for the next few years expect continued single-digit growth in both revenue and earnings.
• Growth-Valuation Balance: The screening method accepts that expansion might not be the main factor here. The idea is that the market might be underestimating Zoom's very profitable, debt-free business model, even with its more settled expansion picture.

Conclusion

Zoom Communications Inc offers a strong case for investors using a "Decent Value" method. The stock seems to be priced low according to common measurements when compared to both the market and its industry. This possible discount is supported by a very strong balance sheet with no debt and high liquidity, combined with very good profitability margins. While its growth speed has slowed from earlier levels, the company keeps a steady, cash-producing business. For value-focused investors, this mix of a fair price, excellent financial condition, and good profitability could be a situation where the market has been too harsh on the stock for its slower growth, missing its basic quality and lasting strengths.

This assessment was produced using a screening method that finds companies with comparable traits. If you want to find other stocks that match this "Decent Value" description, you can view the complete screen results here.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy, sell, or hold any security, or an endorsement of any investment strategy. All investments involve risk, including the possible loss of principal. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions.