Zoom shares are up 300% since the IPO! Too late for Brits to invest?

Zoom shares are up about 300% since the company’s IPO. Are they still worth considering for UK investors? Anna Sokolidou tries to find out.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Zoom (NASDAQ:ZM) shares are up about 300% since the company’s IPO. It might be tempting for some UK investors to buy this stock when some people are still working from home. But is it too late to load up on these shares?

Zoom shares surge

On 18 April 2019, Zoom Video Communications enjoyed a terrific IPO start. Many investors or, better said, speculators rushed to buy the company’s shares.

I wouldn’t say Zoom shares fell dramatically after the IPO rally. But at the end of 2019 all the previous gains were erased. Then, after the beginning of the lockdown period in March the shares began rising at a really fast rate. As can be seen from the graph, if you had invested $10,000 in Zoom, your stake would be worth about $40,000 today. From a technical perspective it seems they are due for a correction.

How about the company’s fundamentals? To start with, I quite agree that distance working will probably continue for a while. Some companies will likely allow their employees to work from home even after the end of the pandemic. It’s quite practical for many employers since they don’t have to pay rent and many other relevant expenses. So, companies like Zoom should grow well. And so should Zoom shares. 

I also agree with my colleague Michael Baxter that investing in high-tech shares might be some sort of a hedge against low GDP growth. In fact, in the past few years, well-established ‘cyclical’ companies like banks and miners didn’t do particularly well in terms of earnings. This is because the real global economy started slowing down long before the pandemic. But high-tech excelled. 

But is Zoom a reasonable company to invest in? 

Here are the company’s revenues and earnings over a four-year period.

Source: Zoom Video Communications

Looks like impressive revenue growth, doesn’t it? In 2019, Zoom managed to make a small profit of $7.58m. In 2020, Zoom’s net profit totaled $25.3m. All very well. But how about the valuations? The earnings-per-share (EPS) for 2020 was $0.09, whereas the stock price now is about $268. This brings us to the price-to-earnings (P/E) ratio of 2,977. Remember that a P/E of 20 is average, if not high. I appreciate that earnings might increase dramatically by 2021. But the thing is that you’d pay a high price today, if you decide to invest now. 

And how about the competitive landscape? Well, the high demand for video conferencing is matched by many suppliers. Plenty of firms offer a wide variety of very similar services. Think about Microsoft Teams, Skype, Cisco Webex Teams, Adobe Connect, Blue Jeans by Verizon and many other alternatives.

It’s not obvious that Zoom can easily compete with all these companies, and Zoom shares are trading at a really high premium to many other high-tech firms. For example, Microsoft’s shares are trading at a P/E ratio of about 30. Don’t forget that Miscrosoft is a very well-established corporation with a high credit rating.

A perfect buy for Brits?

I understand how tempting it might be for Brits and investors from other countries to buy high-tech stocks. The US offers plenty of opportunities to do so. What is more, investing in overseas companies might be good in terms of diversification. But Zoom shares aren’t, in my opinion, a great fit for a value investor.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Anna Sokolidou has no position in any of the companies mentioned in this article. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Microsoft and Zoom Video Communications. The Motley Fool UK has recommended Verizon Communications and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and short August 2020 $130 calls on Zoom Video Communications. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »