For investors looking for chances in the market, the principles of value investing provide a proven structure. Essentially, this method focuses on finding companies whose present market price seems to be lower than their actual worth. The aim is to discover good businesses that are temporarily unpopular or not fully understood by the market, offering a possible "margin of safety" for the investor. A systematic method frequently includes looking for stocks that show good fundamental condition and earnings, but are valued at a lower price based on standard valuation measures. This pairing indicates a company is not just low-priced, but low-priced without a clear cause, a possible option for price increase as the market adjusts its view.
One stock that recently appeared through such a systematic looking process is Zoom Communications Inc. (NASDAQ:ZM). The company, which became widely known during the pandemic for its video conferencing platform, is now examined through a more standard business view. A fundamental examination indicates it may offer an interesting case for value-focused investors observing more than short-term stories.
Valuation: An Interesting Entry Point
The most direct appeal for a value investor is the stock's price compared to similar companies and its own past situation. According to ChartMill's fundamental examination report, Zoom's Valuation Rating is a good 7 out of 10, showing it is priced well. This score comes from several important measures that compare well overall.
- Price-to-Earnings (P/E): Zoom's P/E ratio of 15.64 is viewed as more affordable than about 78% of its software industry peers, whose average P/E is above 35. It also trades at a significant discount to the S&P 500's average P/E of 28.32.
- Forward P/E: The view stays the same looking forward, with a forward P/E of 14.74. This is more affordable than about 80% of the industry and under the wider market average.
- Cash Flow & EBITDA Multiples: The valuation argument is also backed by enterprise-value-to-EBITDA and price-to-free-cash-flow ratios, which are more affordable than 87% and 86% of industry rivals, in that order.
For a value method, these measures are important. They give a numerical beginning, suggesting the market may be using a negative discount to Zoom's future earnings and cash flows. This makes the possible difference between market price and actual worth that value investors aim to use.
Financial Health: A Strong Balance Sheet
A low price alone can be a "value trap" if the company's financial base is weak. This is where Zoom's fundamental condition becomes a key point of difference. The company gets a very good Health Rating of 9 out of 10, showing notable financial strength.
- Zero Debt: Zoom has no interest-bearing debt on its balance sheet. This removes leverage risk and gives great operational and strategic freedom.
- Strong Liquidity: With a Current Ratio and Quick Ratio both at 4.45, the company holds liquid assets much higher than its short-term obligations. This does better than about 85% of the software industry and shows no immediate solvency issues.
- Bankruptcy Risk (Altman-Z): A very high Altman-Z score of 9.85 puts Zoom in the best group of its industry for financial steadiness, not close to any trouble area.
This element of very good condition is important for the value investing idea. It provides the "margin of safety" Benjamin Graham highlighted. Even if the business meets challenges or the market's negative view continues, a strong, debt-free balance sheet allows the company time to follow its plan without pressure from lenders, safeguarding investor money.
Profitability: High-Quality Earnings
Value investing is not about purchasing bad companies at low prices; it is about purchasing good companies at reasonable or reduced prices. Zoom's Profitability Rating of 8 out of 10 confirms it is a fundamentally earning company.
- Notable Margins: The company keeps a very good Profit Margin of 33.17% and an Operating Margin of 23.24%, doing better than over 90% and 88% of its industry, in that order. Its Gross Margin of 76.89% is also good.
- Efficient Capital Use: Returns on Assets (13.99%) and Equity (17.16%) are with the best in the software field, showing efficient use of shareholder capital.
- Steady Cash Generation: The report notes positive earnings and operating cash flow in each of the last five years, a sign of a lasting business model.
Good profitability is a key filter for value searches because it shows a company with a competitive advantage and pricing ability. It suggests that the present low valuation is not because of a failed business model but possibly because of passing factors or changing market expectations.
Growth: A Maturing Profile
The growth story for Zoom has naturally changed from the very high-growth period of 2020-2021. Its Growth Rating is a neutral 5, showing this change. Past growth in Revenue and Earnings Per Share (EPS) has been very good over several years, but the speed has slowed lately and is expected to continue at a slower, single-digit rate in the near term.
For a value investor, this slowed growth profile is part of the chance. The market often penalizes companies as they become established, creating a separation between price and the lasting worth of a still-earning, cash-producing franchise. The search criteria needed "acceptable" growth, which Zoom meets, it is not shrinking, but changing. The test and chance lie in judging whether the market has adjusted too much in its downward re-pricing.
Conclusion and Further Research
Zoom Communications Inc. offers an interesting case for value-focused examination. It joins an attractively priced stock with a very strong balance sheet and high-quality earnings, all while changing to a more established growth stage. This matches a central value investing rule: looking for financially stable companies that are temporarily priced low by the market.
It is important to state that value achievement is not certain and needs patience. The company faces the continuing test of growing its platform beyond main meetings and competing in a full collaboration software market. Investors must balance these business operation risks against the notable fundamental strengths shown.
Interested in finding other stocks that match a similar profile? You can look at more possible chances using the Decent Value Stocks screen on ChartMill, which selects for companies with acceptable valuation, good health, profitability, and growth.
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 analysis is based on data and sources believed to be reliable, but its accuracy cannot be guaranteed. Investing involves risk, including the potential loss of principal. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.
