Buy better: Zoom Video Communications vs Alphabet
Llast november, I compared Focus on video communications (NASDAQ: ZM), one of the hottest growth stocks of the pandemic, at Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the technological juggernaut that owns Google. At the time, I claimed that Zoom would generate larger gains than Alphabet over the next year, as the pandemic was “far from over” – and more users could join Zoom as Google was struggling with a slowdown in ad sales.
But since I made that call, Zoom’s shares have fallen by almost 20%, while Alphabet’s shares have risen by more than 55%. Let’s see why Zoom lost its luster while Alphabet once again attracted the bulls.
Image source: Zoom.
Zoom always grows faster than Alphabet
Zoom has become synonymous with video calls during the pandemic. His eye-catching branding and straightforward group calls have helped him disrupt a market filled with complex, business-focused services.
The basic level of Zoom is free, but paid users enjoy longer meeting times, access to larger meetings, cloud-based tools, and other perks. Larger customers, such as businesses and schools, often opt for its premium tiers.
Zoom has generated incredible growth thanks to its simple business model. Its revenue soared 326% to $ 2.65 billion in fiscal 2021, which ended in January, as its adjusted net profit jumped 883% to $ 996 million.
However, Zoom also expects its growth to slow down as the pandemic ends. For fiscal 2022, it expects its revenue to increase by 50% to 51% and its adjusted profit to increase between 37% and 38%. These growth rates are still impressive, but analysts expect even slower growth in 2023.
Zoom’s uncertain future in a post-pandemic world – along with competition from FacebookMessenger, Google Meet and CiscoWebex, among others, might make it difficult to justify its sparkling forecast P / E ratio of 80. The rotation from growth stocks to value stocks in recent months has also made Zoom less attractive than well-established tech stocks like Google and its peers FAANG.
Zoom is expanding its moat with new features, like its event platform for live ticketed events, and hardware devices like telephone devices. However, many of Zoom’s competitors are already tapping into much larger ecosystems – and they can afford to provide free video calls to lock out more users.
But Alphabet’s advertising business quickly recovered
Alphabet struggled in the first half of 2020 as the pandemic dampened the growth of Google’s advertising business. Google cushioned the blow with its cloud business – which benefited from the growing use of online services during the pandemic – but it generated lower margin revenue than its advertising business.
This unbalanced growth dampened my enthusiasm for Alphabet last November. However, Google’s advertising business quickly picked up in the second half of the year, with more businesses reopening.
As a result, Alphabet’s revenue grew a further 13% to $ 182.5 billion for the full year. Google’s ad revenue, which accounted for 80% of that total, increased 9%. Its cloud revenues, which accounted for an additional 7% of that total, jumped 46%. Its net profit rose 17% to $ 40.3 billion.
Unlike Zoom, which faces a post-pandemic slowdown, Alphabet’s growth is likely to accelerate this year as its advertising and cloud business grows. Analysts expect its revenue and profits to grow by 30% and 49% respectively in FY2021, before slowing down in FY2022.
These are high growth rates for a stock that trades at just 26 times earnings over time. This lower valuation should make Alphabet a more attractive investment if the market continues to avoid growth stocks.
Alphabet’s business is more diversified than Zoom’s, but it continues to expand into new markets with Waymo, its autonomous vehicle subsidiary and its life sciences subsidiaries Calico and Verily. These companies are still much smaller than Google, but they could generate surprising growth in the future.
The short-term winner
The last time I compared these two companies, I underestimated the resilience of Google’s advertising business and overestimated the market’s willingness to pay high premiums for “hyper-growing” stocks like Zoom. I also expected the pandemic to last much longer.
But now I think Alphabet will outperform Zoom for the rest of the year. Zoom still has a lot to prove and investors are likely to favor stable growth stocks like Alphabet over speculative stocks like Zoom.
That being said, Zoom still has a lot of growth potential. It continued to grow in the face of fierce competition, and it could gradually expand its video conferencing platform into a more complex suite of cloud services. If that happens, Zoom could still beat Alphabet in the long run.
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Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of its CEO, Mark Zuckerberg, is a member of the board of directors of The Motley Fool. Leo Sun owns shares of Cisco Systems. The Motley Fool owns shares and recommends Alphabet (A shares), Alphabet (C shares), Facebook and Zoom Video Communications. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.