Each week, I’ll give an overview of a stock and Licia Leslie will follow that up with a chart analysis the next day. Bill Griffo will chime in with macro analysis and Andrew Giovinazzi will then finish out the week with a volatility breakdown.
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Hey Traders,
Cathy Wood of ARK Innovation ETF (Ticker: ARKK) funds has her detractors and her admirers.
Some argue that the investments in ARKK are mostly companies that won’t be around in 10 years because their balance sheets are so bad.
Her admirers will tell you she’s ahead of the game and looking at companies that will someday be 10x the current valuations.
Today, I thought we could look at one of ARKK’s holdings – Zoom Communications (Ticker: ZM).
We at Option Pit use Zoom almost every day, so it would make sense that the company MUST be up to something good ….or is it just the solution right now?
Let’s dig in.
The Good
Zoom has become the Kleenex of online meetings. “Let’s have a Zoom Call” could mean any other meeting platform, but it’s called a Zoom call.
That type of brand power is powerful. It provides staying power to a name. I still buy Kleenex instead of store brand because I think the tissue will be better; the same holds true currently for Zoom.
Looking at the numbers, things are not as murky as one might expect from an ARKK holding.
The company makes money. It made in its last quarter on an adjusted basis 1.16 a share – that’s not bad.
It has over 215,000 enterprise partners (Option Pit Included) that are pushing that income.
The stock is sitting on a ton of cash – 18.42 dollars of cash per share based on the last quarter. It produces 15.71 or revenue per share and has a strong 15.71 per share.
This is a real company with real earnings and somewhat consistent revenue. The company has a gross margin of 74.95%, and that’s not bad.
Is the company in a business that is super exciting? No.
But are they making money? Yes.
The Bad
The PE is insane, at about 192. That means the company needs to grow a TON in both revenue and earnings to meet the current valuation.
Basically, the stock is priced at a higher valuation than Nvidia Corp (Ticker: NVDA), which is in AI – and this is an online meeting company.
That brings me to the real issue: saturation and competition.
Think about the companies that offer online meetings: Google, Microsoft, Meta … and that’s just the mega caps.
There are also smaller companies that offer online meeting solutions that are as good or better than Zoom.
Zoom is currently the leader, but the company is not a Kleenex – online meetings can get better, but a tissue is unlikely to do so.
The barriers to entry for competition are low, and the big boys are in the game.
This looks all and all like a bad environment for a high PE.
Remember just a few years ago just about everyone used Go-To-Meeting. Now no one does.
ZM stock looks a lot more like an AOL than it does a GOOGL.
The Verdict
If the valuation falls dramatically, this could be an interesting stock on a take over.
But the long term prospects here are weak. If I owned it, I would sell it. If my kid tried to buy it, I’d stop him.
And frankly, the sooner Licia says it is a short, the better. This is the most serious stay away we have covered.
Questions about that? Leave a comment below!
Your Only Option,
Mark Sebastian