Zoom Communications Inc (NASDAQ:ZM) Presents a Value Investing Case with Strong Fundamentals

The search for undervalued companies remains a cornerstone of value investing, a strategy pioneered by Benjamin Graham and David Dodd nearly a century ago. This approach involves identifying stocks trading for less than their intrinsic value, providing a potential margin of safety for investors. One method for uncovering such opportunities is by using systematic screens that filter for specific fundamental characteristics. A "Decent Value" screen, for instance, targets companies with strong valuation metrics while maintaining acceptable scores in profitability, financial health, and growth. This balanced method helps identify stocks that are not merely cheap but are priced attractively relative to their underlying business quality.

Valuation Metrics The appeal of ZOOM COMMUNICATIONS INC (NASDAQ:ZM) from a value perspective is immediately apparent in its valuation ratios. The company's current valuation metrics suggest it is priced conservatively compared to both its industry and the broader market. For value investors, these metrics are critical as they indicate the price being paid for each dollar of earnings or cash flow, with lower ratios often signaling potential undervaluation.

• A Price-to-Earnings (P/E) ratio of 14.46 is cheaper than 83.63% of its software industry peers and sits well below the S&P 500 average of 26.28.
• The Price-to-Free-Cash-Flow ratio also indicates a valuation cheaper than 89.32% of the industry.
• The Enterprise Value-to-EBITDA ratio is particularly notable, being more favorable than 91.10% of industry competitors.

Financial Health A strong financial foundation is non-negotiable for value investors, as it reduces the risk of permanent capital loss and indicates a company's ability to withstand economic downturns. Zoom's financial health is exceptional, providing a significant buffer and aligning with the value investing principle of preserving capital. A solid balance sheet means the company is less likely to face distress and is better positioned to invest in future opportunities or return capital to shareholders.

• The company has a top-tier Health Rating of 9 out of 10, outperforming the vast majority of its sector.
• Zoom carries no debt, resulting in a Debt-to-Equity ratio of 0, which is one of the best in the industry.
• High liquidity is evidenced by a Current Ratio and Quick Ratio of 4.45, indicating no difficulty in meeting short-term obligations and outperforming 86.12% of peers.

Profitability Profile While a low price is attractive, value investing requires that the business itself is high-quality and generates solid returns. Zoom's profitability metrics confirm that this is not a struggling company but a highly profitable one. Strong and consistent profitability is essential for value investments, as it validates the company's business model and provides the earnings power that, over time, should be reflected in the share price.

• The company earns a Profitability Rating of 8 out of 10.
• Key margins are industry-leading, with a Profit Margin of 24.99% and an Operating Margin of 20.81%, outperforming over 86% of software companies.
• Returns on capital are acceptable, with a Return on Invested Capital (ROIC) of 8.34% that surpasses nearly 80% of its peers.

Growth Considerations Although value investing often prioritizes price over hyper-growth, a reasonable growth trajectory can help close the gap between market price and intrinsic value. Zoom's growth profile shows a transition from its explosive pandemic-era expansion to a more mature, but still positive, growth phase. For a value investor, this manageable growth reduces the risk of overpaying for unrealistic future expectations while still offering the potential for earnings expansion.

• The Growth Rating is a neutral 5, reflecting a company in a new phase of its lifecycle.
• Historically, revenue has grown at an impressive average of 49.60% per year over recent years.
• Looking forward, analysts project modest but stable growth in both revenue and earnings per share, in the range of 3.6%.

A detailed breakdown of these fundamental ratings is available in the full fundamental analysis report.

Conclusion Zoom Communications presents a strong case for investors employing a value-oriented strategy. The stock appears undervalued based on traditional earnings and cash flow multiples, while the company itself exhibits outstanding financial health and high profitability. This combination of a reasonable purchase price and a high-quality business foundation aligns well with the principles of value investing, which seeks a margin of safety by buying solid companies when they are out of favor. The company's shift to a more moderate growth rate is likely a key factor in its subdued valuation, offering a potential opportunity for investors who believe in its long-term cash-generating ability.

For investors interested in discovering other companies that fit a similar profile of good valuation and solid fundamentals, further research can be conducted using the Decent Value Stocks screen on ChartMill.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The opinions expressed are based on current market conditions and data available at the time of writing, which are subject to change. All investments involve risk, including the possible loss of principal. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.