Better Buy: Zoom Video Communications Battles Microsoft for Video

The pandemic-led rise in virtual learning and remote meetings helped video conferencing platforms thrive. However, with companies’ return to the office, the demand for video conferencing has declined significantly in this post-pandemic world.

Prominent players in this space are launching new features to stay relevant. Also, the industry should remain in demand with a permanent shift toward hybrid working. The global video conferencing market is expected to grow at a 12.5% CAGR to reach $19.73 billion by 2030.

Zoom Video Communications, Inc. (ZM) battles with Microsoft Corporation (MSFT) to gain market share. While ZM lost 18.9% over the past month, MSFT surged 6.4%. But which stock is a better buy now? Let’s find out.

Latest Developments

On August 9, 2022, British multinational universal bank Barclays Bank PLC announced the deployment of MSFT’s Microsoft Teams as its preferred collaboration platform.

This will enable Barclays to connect its employees better and enhance the data retention, search, and retrieval capabilities available within Microsoft Purview to meet its needs. This should help MSFT nurture a long-term partnership with Barclays in the long run.

On June 23, 2022, ZM unveiled the latest evolution of its communications platform with the introduction of Zoom One. This new offering combines persistent chat, phone, meetings, whiteboard, and more into secure and scalable packages. The company has also launched an all-new translated and multi-language captions feature. This is expected to witness great demand from enterprises in the future.

Recent Financial Results

For its fiscal 2022 fourth quarter ended June 30, 2022, MSFT’s total revenue increased 12.4% year-over-year to $51.87 billion. The company’s gross profit came in at $35.44 billion, up 10.2% from the prior-year period. Its operating income came in at $20.53 billion for the quarter, representing a 7.5% rise from the prior-year period.

While its net income increased 1.7% year-over-year to $16.74 billion, its EPS increased 2.8% to $2.23. As of June 30, 2022, the company had $13.93 billion in cash and cash equivalents. 

ZM’s revenue for the fiscal 2023 second quarter ended July 31, 2022, increased 7.6% year-over-year to $1.10 billion. The company’s gross profit came in at $825.85 million, indicating an 8.6% rise from the prior-year period. Its non-GAAP income from operations came in at $393.73 million for the quarter, down 7.3% from the year-ago period.

ZM’s non-GAAP net income came in at $323.49 million, representing a 22.1% decline from the prior-year period. Its non-GAAP EPS came in at $1.05, indicating a 22.8% year-over-year decline. It had $937.44 million in cash and cash equivalents as of July 31, 2022.

Past and Expected Financial Performance

Over the past three years, MSFT’s EBITDA, net income, and tangible book value have grown at CAGRs of 21.6%, 22.8%, and 18.6%, respectively.

MSFT’s EPS is expected to grow 10% year-over-year in fiscal 2023, ending June 30, 2023, and 17.9% in fiscal 2024. The company’s revenue is expected to grow 11.4% year-over-year in fiscal 2023 and 13.9% in fiscal 2024. Its EPS is expected to grow at a rate of 15.4% per annum over the next five years.

Over the past three years, ZM’s EBITDA, net income, and tangible book value have grown at CAGRs of 258%, 325.5%, and 98.5%, respectively.

Analysts expect ZM’s EPS to decline 26.5% in fiscal 2023, ending January 31, 2023, and 0.4% in fiscal 2024. The company’s revenue is expected to grow 7.3% year-over-year in fiscal 2023 and 3.8% in fiscal 2024. Its EPS is expected to grow at a 13.6% rate per annum over the next five years.

Valuation

In terms of forward EV/Sales, MSFT is currently trading at 8.95x, 109.1% higher than ZM’s 4.28x. In terms of non-GAAP forward PEG, ZM’s 1.56x compares with MSFT’s 2x.

Profitability

MSFT’s trailing-12-month revenue is 46.1 times that of ZM’s. MSFT is also more profitable, with a 49.4% EBITDA margin versus ZM’s 21.2%.

Furthermore, MSFT’s ROE, ROA and ROTC of 47.2%, 0.2% and 22.2% compare with ZM’s 18.6%, 0.1% and 9.8%, respectively.

POWR Ratings

While MSFT has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, ZM has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

MSFT and ZM have a B grade for Quality, reflecting their higher-than-industry profitability ratios. MSFT’s 36.7% trailing-12-month net income margin is 763.6% higher than the 4.3% industry average. ZM has a 23.1% trailing-12-month net income margin, which is 442.8% above the industry average of 4.3%.

MSFT has a B grade for Stability, which is in sync with its lower volatility compared to the industry average. MSFT has a 0.94 beta. ZM’s D grade for Stability reflects its negative beta.

Of the 53 stocks in the Software – Business industry, MSFT is ranked #10. In contrast, ZM is ranked #43 of 82 stocks in the Technology – Services industry.

Beyond what we have stated above, our POWR Ratings system has graded MSFT and ZM for Growth, Value, Sentiment, and Momentum. Get all MSFT ratings here. Also, click here to see the additional POWR Ratings for ZM.

The Winner

Although ZM is trying to strengthen its product portfolios, the return-to-office trend is weighing heavily on the stock. In comparison, a broad range of product offerings and wide market reach should help MSFT perform well. Furthermore, MSFT is a better buy based on its higher profitability.

Our research shows that the odds of success increase if one invests in stocks with an overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Software – Business industry, and here for those in the Technology – Services industry.

MSFT shares were trading at $265.23 per share on Monday afternoon, down $2.86 (-1.07%). Year-to-date, MSFT has declined -20.62%, versus a -14.60% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More…

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