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

The search for undervalued companies with solid basic financials is a foundation of value investing. This method involves finding stocks trading below their actual worth, often identified through a close study of financial condition, earnings power, and expansion possibilities. A systematic method requires that a company is not only inexpensive but also displays good operational traits that indicate it is a sound business currently overlooked. By using a "Decent Value" screen that selects for stocks with high valuation scores while keeping acceptable ratings in earnings, financial condition, and expansion, investors can methodically find possible choices that fit this thinking.

Valuation Metrics

A main draw for value investors is a stock's price compared to its financial results. Zoom Communications Inc (NASDAQ:ZM) presents a strong case on this point, with a Valuation Rating of 7 out of 10. The study shows the stock is priced cautiously relative to both its field and the wider market.

• Price-to-Earnings (P/E) Ratio: ZM's P/E ratio of 13.83 is much lower than the field average of 51.77, making it less expensive than 86% of its software field counterparts. It also trades at a large discount to the S&P 500's average P/E of 27.53.
• Forward P/E Ratio: The forward P/E of 13.02 supports this appealing valuation, staying well under the field and market averages.
• Cash Flow and EBITDA Multiples: The stock is also viewed as inexpensive based on its Price-to-Free-Cash-Flow and Enterprise Value-to-EBITDA ratios, doing better than over 90% of its field rivals on these measures.

For a value investor, these valuation measures are important as they indicate a possible "margin of safety"—a cushion between the market price and the determined actual value. A low P/E ratio for a profitable company can show the market has missed the stock's true value, creating a possible chance for purchase.

Financial Health

A good financial base is essential for value investments, as it confirms a company can survive economic slumps and keep operating without cash flow or bankruptcy problems. Zoom does very well in this area, reaching a top-level Health Rating of 9 out of 10.

• Balance Sheet Strength: The company has no debt, setting its Debt-to-Equity and Debt-to-Free-Cash-Flow ratios at zero, which is with the best in its field.
• Liquidity Position: Zoom shows outstanding short-term financial steadiness with a Current Ratio and Quick Ratio of 4.45, showing sufficient funds to cover short-term debts and doing better than 86% of the field.
• Solvency: An Altman-Z score of 8.83 shows a very low short-term chance of financial trouble, putting it in the top group of financially sound companies in the software field.

This sound financial condition is important for the value investing method because it lowers the chance of lasting loss of capital. A company with no debt and high cash reserves is in a better position to handle difficulties and fund future expansion without creditor pressure, fitting with the value idea of investing in steady, lasting businesses.

Profitability Analysis

Value investing is not only about buying inexpensive stocks; it is about buying good businesses at a reduced price. Zoom's operational effectiveness is clear from its Profitability Rating of 8 out of 10, showing it is a very profitable company.

• Margin Strength:
  • The company has a Profit Margin of 24.99%, better than 89% of its counterparts.
  • Its Operating Margin of 20.81% and Gross Margin of 76.38% are also much higher than field averages.
• Return on Capital: Zoom shows good returns on its investments, with a Return on Assets (ROA) of 10.76% and a Return on Equity (ROE) of 13.27%, both numbers placing it in the top part of its field.

Good and increasing earnings power is a main sign of a company's competitive edge and operational quality. For a value investor, steady earnings confirms that the business plan is solid and that the company is able to produce the cash flows that finally decide its actual value.

Growth Prospects

While value stocks are not usually high-expansion names, lasting expansion is needed to support a higher actual value over time. Zoom's Growth Rating of 5 out of 10 shows a change from its very fast expansion period to a more established, but still positive, expansion path.

• Historical Growth: The company has a notable history, with Revenue increasing at a yearly rate of almost 50% and Earnings Per Share (EPS) increasing at over 73% each year for the past several years.
• Future Expectations: Experts predict more moderate, yet stable, future expansion with yearly Revenue and EPS growth expected to be about 3.6%.

This change from very fast to steady expansion is often what makes a value chance. The market may have over-punished the stock for its expansion slowing, missing its continued earnings power and excellent financial condition. For a value investor, a company that has shown its ability to expand and is now predicted to expand steadily can be a good choice, especially when bought at a reduced valuation.

The basic study for Zoom Communications Inc. indicates a company that is financially sound, very profitable, and trading at a valuation that seems separate from its good operational basics. This mix of a low price and high quality is exactly what filters for "decent value" stocks are made to find.

For investors wanting to look into other companies that fit similar standards of good valuation along with acceptable earnings, condition, and expansion, more study can be done using the Decent Value Stocks screen on ChartMill.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell 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.