Zoom ($ZM) looks decent but likely not undervalued. – Investment Moats

I think you all would know Zoom Communications or its ticker ZM for short.

Zoom have been the poster child that benefit from the pandemic since suddenly, we all need to use it so that we can communicate well on a small or wide group basis.

Here is it’s share price since then:

The stock price peaked at October 2020, and that is probably when it was announced that Covid was about to end. It peaked at $585 and dropped to a low of $55 in Aug 2024. That was brutal.

Interestingly, Zoom has always been profitable and I am quite sure a few value-oriented investors like myself would have take a look at it to see if it is a good buy.

Recently, I have this saying that if you like tech stocks like Amazon, Google Meta Platforms and Apple, you should be interested in these software information stocks that look like they got decimated.

But most likely… you won’t be interested because if they are being decimated, it means that these IT stocks have inherent problems. But didn’t Meta platforms and Google went down on decimating runs?

I guess would think their problems are solvable or temporary problems.

Which is my gripe with folks giving the argument I invest in US tech because they have some competitive advantage. No you don’t. You just like to invest in large cap stocks that happen to be tech that has done well in recent times.

Anyway, I was looking through Jamin Bell’s Clouded Judgement. Jamin provided great value by ranking the cloud computing companies based on various metrics. I saw Zoom trading at 11 times EV/NTM FCF (net 12 months free cash flow).

It was not a surprise to me but I though Zoom’s share price showed some strength and I wonder how their fundamentals is:

Software-as-a-service stock have been decimated most likely due to Artificial Intelligence affecting their business. While these SAAS companies may still be around, they are not cheap today based on next 10 years cash flow but on how long their future cash flow and the growth rate.

AI would potentially cut their margins and that they are currently undergoing violent repricing. If more and more of your value lies in far term cash flow, then the more violent the repricing will get.

This chart shows the 3-month sales estimate revisions. Software stocks are seeing the fastest pace of downward revenue estimate revisions since the GFC, indicating how they feel the environment affects them.

I want to keep this post as short as possible. This is just to note down some of the data work that I did.

I tabulated Zoom’s revenue, cost of revenue, gross profit and their growth below:

You would notice that revenue exploded in a significant way in 2021. Then revenue basically peaked. The cost of revenue also peaked. Since 2022, they have endured very low revenue growth. It is like almost everyone knows Zoom and those who feels like they need Zoom are already on Zoom.

But what I noticed is that their operating cost have been going down over time:

Notice that the R&D, Sales and marketing, and general & administrative costs start going up but peaked at 2023/2024 and then has started coming down. And with that operating income also started improving.

The last line shows their results for the first 9 months. The financials below would compare the first 9 months operating expenses against a year ago:

It is still going down.

Here is the net income, operating cash flow, share based compensation, and the free cash flow if we take out the share-based compensation:

The share-based compensation peaked in 2023 and start coming down as well. I think this year will also be lower.

Zoom’s diluted outstanding shares stands at 305 million and while they have been buying back their shares, the impact has been minimal. In November 2025, they approved an additional $1 billion for buyback.

At $92.1, this puts their market cap at $28 billion. Zoom has about $7.9 billion in cash & short term securities and no debt, so their enterprise value is about $20 billion.

The forecast free cash flow is almost $2 billion so that explains the 10/11 times EV/NTM FCF. But if we backed out the share based compensation I suspect the full year free cash flow is $1.2 billion.

This will put the EV/FCF at 16.6 times or 6% free cash flow yield.

I think currently it is trading at fair value.

Could Zoom be in that unique situation.

1. How likely will AI disrupt them? They are offering a service that requires reliability.
2. In a way, perhaps AI has benefit them such that they are optimizing their costs.
3. While they are investing in R&D, this is not rocket science.
4. There are many who knows about Zoom already thus marketing and outreach can be more optimized.

Zoom in a way seems pretty similar to Tencent Music (My Tencent Music write up) where they might be trying to find the sweet spot.

I like that all the risks might be out:

1. If they are suppose to slow down, they have already dealt with a period of slowing down.
2. If AI is going to pose a problem, it should already be affecting them.

In a way, markets look pretty efficient.

The market seem to think that Zoom does not have extremely outstanding growth but not going to be disrupted.

It is not as cheap at the payments companies like PayPal and Shift4 but in a way the outlook may also not be so murky for Zoom compare to them.

I wonder how much the expenses can be optimized but even then, would I buy it at 6% FCF yield?

If it ever gets to $70-$73 where the FCF yield is 8.4%, I might bite.

I also wonder about what are the catalysts that could propel revenue higher. That would be the icing on top of the cake.

If you want to trade these stocks I mentioned, you can open an account with Interactive Brokers. Interactive Brokers is the leading low-cost and efficient broker I use and trust to invest & trade my holdings in Singapore, the United States, London Stock Exchange and Hong Kong Stock Exchange. They allow you to trade stocks, ETFs, options, futures, forex, bonds and funds worldwide from a single integrated account.

You can read more about my thoughts about Interactive Brokers in this Interactive Brokers Deep Dive Series, starting with how to create & fund your Interactive Brokers account easily.

Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.

Readers also follow Kyith to learn how to plan well for Financial Security and Financial Independence.

Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Fee-only Wealth Advisory Firm Providend. All opinions on Investment Moats are his own and does not represent the views of Providend.

You can view Kyith’s current portfolio here, which uses his Free Google Stock Portfolio Tracker.

His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.

You can read more about Kyith here.