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Zoom (ZM) Stock Could Be 32% Undervalued Despite Strong Cash Flow

Simply Wall St · 2d ago

Zoom Communications has delivered solid gains over the past year, yet its share price still reflects a long shadow from much weaker 5 year returns. That split history raises a simple question for investors who care about cash generation. Do the cash flows backing Zoom today line up with the current US$97.74 share price or not?

  • Over 5 years the stock has fallen 63.3%, which puts the focus on whether the cash Zoom can generate now and in the future is strong enough to support a recovery in sentiment.
  • The business model is built around recurring software revenue, which can shape the timing, stability and growth of the cash flows that a Discounted Cash Flow (DCF) valuation relies on.
  • If you'd rather focus on earnings, this one's for you. See what Zoom Communications's 8.8x P/E says about the price.

The issue now is whether the cash flows Zoom Communications can realistically produce over time justify where the shares trade today.

If you want to test this same cash flow question beyond Zoom Communications, compare it with a wider set of companies in the 28 high quality undervalued stocks

Is Zoom Communications a Bargain on Cash Flow?

The Discounted Cash Flow (DCF) model here focuses on the cash Zoom Communications can return to shareholders over time. On the latest twelve month figures, the group produced roughly $1.9b in free cash flow, which gives you a sizable cash engine to compare against the current $97.74 share price.

Analysts feeding into this DCF expect those free cash flows to keep growing rather than shrinking, with projections extending out over a decade and beyond. The set of estimates implies a business that is still adding to its cash base instead of relying on a one off spike. On these assumptions, the Discounted Cash Flow (DCF) projections put Zoom Communications' estimated intrinsic value substantially above the current share price. This suggests the cash flow profile screens stronger than the market price indicates right now. Find out what Zoom Communications could be worth using our Discounted Cash Flow (DCF) estimate.

The Zoom Communications Narrative: What Would Justify Today's Price?

Narratives pick up where that Discounted Cash Flow puzzle leaves off for Zoom Communications. They outline which paths for revenue, profitability and earnings would need to occur for the shares to trade meaningfully higher or lower than today. These narratives are available on Simply Wall St's Community page, so you can treat each one as a thesis about Zoom Communications' fair value that can be revisited over time instead of viewed as a one-day snapshot.

Zoom Communications has sparked two very different readings, with one camp seeing meaningful upside and another arguing the stock is only a little ahead of itself.

Bull case: 17% undervalued

"Strong and accelerating adoption of AI powered features across Zoom Communications, including AI Companion, custom AI Companion and ZoomMate, with paid monthly active users of Workplace AI features up 125% year over year and AI Companion paid MAUs up 184% year over year, supports a view that AI usage is now translating into both indirect monetisation through lower churn and upsell and direct monetisation through paid SKUs..."

Discover why this Narrative puts Zoom Communications at 17% undervalued.

Bear case: 5% overvalued

"The increasing commoditization of communications platforms is likely to compress margins and accelerate customer churn for Zoom, as feature parity and aggressive pricing among competitors threaten both revenue growth and profitability..."

Explore why this Narrative puts Zoom Communications at 5% overvalued.

One more Zoom Communications check that sits beside the cash flow math

Price and cash generation tell only part of the story for Zoom Communications, because the people setting priorities, incentives and rewards at the top can tilt long term outcomes in ways a model cannot capture. See who runs Zoom Communications and how they are paid.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.