Zoom Communications Inc (NASDAQ:ZM) Emerges as a Compelling Value Stock

For investors looking for chances where a company's market price may not match its basic strength, a systematic value method can be a useful rule. This process involves searching for companies that seem priced below their basic worth by common measures while still showing good financial condition, steady earnings, and acceptable expansion potential. The aim is to spot possible differences between a stock's present price and its true business worth, offering a buffer for the patient investor.

One company that recently appeared from such a "reasonable value" filter is Zoom Communications Inc (NASDAQ:ZM). The video conferencing leader, which grew widely known during the pandemic, now shows a picture that fits several important value-focused measures. A close fundamental analysis report shows a company priced below its own past and sector comparisons, yet supported by a very strong balance sheet and solid profit margins.

Valuation: Priced Below Worth

The central idea of value investing is buying assets for less than their true value. Zoom's present valuation measures indicate the market could be presenting such a chance, especially when measured against its software sector rivals and the wider market.

• Price-to-Earnings (P/E): Zoom's P/E ratio is 14.90, which is much lower than 82% of its software sector rivals and below the S&P 500 average of about 26.6.
• Forward P/E: Looking forward, the situation stays much the same. With a forward P/E of 14.09, Zoom is valued lower than 82% of its sector.
• Cash Flow & EBITDA Multiples: The value argument goes beyond earnings. The company's Enterprise Value to EBITDA and Price to Free Cash Flow ratios are also in appealing ranges, ranking lower than about 91% and 90% of sector rivals, in turn.

These measures are key for value investors as they give number-based standards for spotting possible low pricing. A low P/E alone is not sufficient, it must be viewed next to the company's financial steadiness and earnings quality, which is where Zoom's other scores become key.

Financial Health: A Very Strong Balance Sheet

A low-priced stock can be a poor investment if the company's finances are weak. For value investors, a sound financial base is essential, as it offers durability during economic slowdowns and pays for future expansion. Zoom performs very well in this area, receiving a nearly ideal Health score of 9 out of 10.

• Zero Debt: The company has no debt, putting its Debt/Equity and Debt/FCF ratios at zero. This is a very strong position that removes interest cost risk and gives great strategic freedom.
• High Liquidity: Zoom's Current Ratio and Quick Ratio are both a solid 4.45, showing it has more than sufficient short-term assets to meet its short-term obligations many times over. This beats 85% of the sector.
• Low Bankruptcy Risk: The Altman-Z score, a gauge of bankruptcy risk, is a very sound 9.49, indicating financial steadiness and beating 87% of rivals.

This flawless balance sheet serves as a major buffer, a key idea in value investing. It means the company can endure shifts, put money into new ideas, or give money back to shareholders without lender pressure.

Profitability: Good Quality Earnings

A low-priced company must also be a earning one. Value methods steer clear of "value traps", companies that are low-priced because their business models are failing. Zoom's Profitability score of 8 out of 10 confirms its ability to produce good quality earnings.

• Very Good Margins: The company has a very good Profit Margin of 33.17% and an Operating Margin of 23.24%, beating 92% and 89% of the software sector, in turn. Its Gross Margin stays sound at 76.89%.
• Strong Returns: Zoom provides a Return on Equity of 17.16% and a Return on Assets of 13.99%, both numbers placed in the top group of its industry.
• Steady Cash Generation: The company has produced positive earnings and operating cash flow in each of the last five years, showing the durability of its profits.

For a value investor, these measures show that Zoom's low price is not a sign of poor earnings ability. Instead, the market might be setting a low price on a company that changes revenue into profit at a high level.

Growth: A Developing Picture

Growth is the final part, as it supplies the driver for a change in the stock's price. Zoom's Growth score is a middle 5, showing its shift from the very fast expansion phase of the pandemic to a more settled, continued increase.

• Past Strength: In the past, Zoom's growth was very fast, with Revenue increasing at an average yearly rate of almost 50% over recent years and EPS increasing over 73% on average.
• Current & Future View: More recent growth has slowed, with last year's revenue up 3.85% and EPS up 6.32%. Experts expect small single-digit growth in both revenue and earnings going forward.
• The Value View: For a value-focused filter, this slower growth picture is acceptable and even typical. The method looks for companies that are not in a high-expansion, high-hope phase, but those with stable, foreseeable growth that the market might be missing due to a short-term focus on past very fast expansion trends.

Conclusion

Zoom Communications presents a strong example for investors using a systematic value method. The stock seems priced below worth based on normal earnings and cash flow comparisons when set against both its industry and the wider market. Importantly, this lower price is combined with a clean, debt-free balance sheet that gives a wide buffer and very high profitability margins that confirm the quality of the basic business. While its growth has slowed from pandemic highs, it stays positive, giving a base for future gain.

This mix of points, low price, very good financial health, and high profitability, is exactly what value-focused filters are made to find. Zoom is not a risky bet on future buzz, but an investment in a financially sound market leader that may be presently priced below its true business value.

Interested in finding other stocks that fit a similar "reasonable value" picture? You can run the filter yourself and look at more possible chances here: Discover More Value Stock Ideas.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any securities. The analysis is based on data and scores provided by ChartMill. Investors should conduct their own due diligence and consider their individual financial circumstances and risk tolerance before making any investment decisions.