Buy better: Zoom Video Communications vs Microsoft
Zoom (NASDAQ: ZM) and Microsoft (NASDAQ: MSFT) were both well isolated from the pandemic. The Zoom brand has become synonymous with video conferencing as more and more people have stayed at home, worked remotely, and took courses online. Microsoft’s cloud, gaming, and surface business benefited from stay-at-home trends and offset temporary disruptions in its business-oriented software business.
I compared these two tech stocks last August and said that Microsoft’s broader diversification, more reliable returns, and lower valuations made it a better investment. Both stocks are up around 20% since I made this call, so there is no clear winner yet. Let’s take a fresh look at the two companies to see if my initial appeal holds up the rest of the year.
Zoom faces an uncertain future
Zoom operates a freemium platform, which grants paid users longer deadlines, support for larger meetings, cloud-based recording, and other benefits. Its revenue jumped 326% to $ 2.65 billion in fiscal 2021, which ended in January, as its net profit surged. more than 30 times to $ 672 million. On a non-GAAP basis, its net income increased almost tenfold to $ 996 million.
Zoom expects its revenue to grow 42% to 43% in fiscal 2022 and its non-GAAP EPS to nearly triple. These are incredible growth rates, but it’s unclear whether Zoom will be able to continue to grow after the pandemic is over and people will come out again.
Meanwhile, a growing list of competitors – including Microsoft Teams, AlphabetGoogle Meet, Facebookmessenger rooms, and CiscoWebex – all trying to distract users from Zoom.
This dynamic makes Zoom a stock that divides. The Bulls believe it will remain synonymous with video calling as it locks down its users with additional services and benefits. Bears believe it will struggle to keep pace with its bigger competitors, many of whom can afford to undercut Zoom’s prices.
Microsoft is on firmer ground
Microsoft’s revenue grew 13% to $ 143 billion in fiscal 2020, which ended in June, and its adjusted EPS increased 14%. Its Productivity and Business Processes segment, which provides productivity software to corporate clients, struggled in the second half of the year, but growth in its other businesses cushioned the blow.
In the first nine months of fiscal 2021, Microsoft’s revenue grew 16% year-over-year to $ 122 billion, as its adjusted profit rose 35%. Its three main businesses (productivity and business processes, intelligent cloud and more personal computing) have increased their revenues and operating profits year over year.
Much of this growth has come from its commercial cloud, which includes the Office 365 productivity suite, the Dynamics 365 CRM (customer relationship management) platform, and Azure, the second largest cloud infrastructure platform. in the world after Amazon Web Services (AWS). Its commercial cloud revenue grew 33% year-over-year to $ 49.6 billion, or 41% of its revenue, in the first nine months of 2021.
Analysts expect Microsoft’s revenue and profits to grow 16% and 35% for the full year, respectively. In fiscal 2022, they expect its revenue and profit to grow by 12% and 8% respectively.
Neither stock is cheap, but Microsoft is still a better buy
Zoom is trading at around 80 times futures earnings and 25 times this year’s sales. Those high valuations, along with its uncertain future in a post-pandemic world, could keep the bulls at bay.
Additionally, inflation fears, rising bond yields, and a focus on post-pandemic games have triggered a rotation from growth stocks to value stocks in recent months. This trend has already erased a large chunk of Zoom’s gains from last year and could slow its growth even further throughout the year.
Microsoft is trading at 30 times forecast earnings and eleven times this year’s sales. These valuations are historically high, but its reputation as an evergreen tech action should keep investors interested.
Its 0.9% forward yield won’t appeal to any serious investor, but its low 30% cash dividend payout ratio indicates that it has plenty of room for future hikes. Zoom has never paid a dividend.
Based on all of these facts, I reiterate my previous call that Microsoft is the best overall investment for most investors. Zoom is still a disruptive company with strong growth potential, but I’m still not confident enough in its future to consider it a good long-term investment.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.