Better buy: Zoom Video Communications vs. Alphabet

Which household tech name will generate bigger returns over the next few quarters?
The post Better buy: Zoom Video Communications vs. Alphabet appeared first on Motley Fool Australia. –

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Business people in an office holding a Zoom meeting

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Zoom Video Communications(NASDAQ: ZM) stock soared about 660% this year as the COVID-19 crisis brought millions of new users to its video conferencing platform. Just as Google became a verb for online searches, Zoom became synonymous with video calls.

Meanwhile, shares of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the parent company of Google, rose just over 10% this year as companies purchased fewer ads during the coronavirus pandemic.

Zoom had a great run, but will it continue to outperform Alphabet over the coming year? Let’s dig deeper into both companies to find out.

Zoom: Breakneck growth with a cloudy future

Zoom operates a “freemium” business model, in which free users can upgrade to paid tiers to remove time limits, host more people per meeting, gain cloud storage tools, and unlock other perks.

Zoom’s revenue rose by 88% in fiscal 2020, which ended in January, and its adjusted earnings per share (EPS) soared 483%. But in the first half of fiscal 2021, its revenue jumped 270% year-over-year as more people used Zoom for remote work, online education, and staying in touch with friends and family members.

That triple-digit revenue growth easily outpaced its operating expenses, and its adjusted EPS grew tenfold. Zoom expects its full-year revenue to rise 281%-284% as its adjusted earnings rise sevenfold. After that growth spurt, analysts expect Zoom’s revenue and earnings to rise 31% and 15%, respectively, next year.

Those growth rates are impressive, but Zoom faces three main challenges. First, a growing number of competitors – including Cisco‘s Webex, Google Meet, and Facebook‘s Messenger Rooms – could pull users away from Zoom. These larger competitors can all afford to undercut Zoom’s prices, or even offer the same services for free.

Second, Zoom struggled with several security and privacy debacles over the past year. It’s resolved most of those issues, but future blunders could tarnish its brand and benefit its competitors.

Lastly, it’s unclear if Zoom’s usage rates will remain stable after the pandemic passes, or if they’ll fall off a cliff after people return to work and school. This makes it difficult to tell if Zoom’s frothy forward price-to-earnings (P/E) ratio of 159 is sustainable.

Alphabet: A temporary slump with a clearer future

Alphabet’s revenue rose 18% last year as its earnings grew 12%. But in the first half of 2020, its revenue only rose 6% year-over-year and its earnings declined 16%.

A laptop user conducts an online search.

Image source: Getty Images.

That slowdown was caused by Google’s sluggish ad sales, which grew less than 1% year-over-year in the first half of the year but still accounted for 80% of Alphabet’s overall revenue. The loss of that higher-margin revenue, along with the growth of lower-margin segments like YouTube and Google Cloud, reduced Alphabet’s margins and profits.

Analysts expect Alphabet’s revenue to rise 7% this year, but for that margin pressure to reduce its earnings by 9%. But looking further ahead, they expect its revenue and earnings to grow 21% and 27% respectively, as the pandemic passes and ad purchases accelerate again.

That outlook seems clearer than Zoom’s, but Alphabet also faces three main challenges. First, it faces several antitrust probes across the world, which could result in hefty fines and throttle its ability to expand its search, advertising, and mobile ecosystems.

Second, Google still faces intense competition in the advertising market from Facebook, which leads the social media market, and, which is turning its e-commerce marketplaces into advertising platforms. Google has repeatedly failed to crack both the social media and e-commerce markets.

Lastly, Google controlled just 6% of the cloud infrastructure market in the second quarter of 2020, according to Canalys, putting it in a distant third place behind Amazon Web Services (AWS) and Microsoft‘s Azure. To remain competitive, Google will likely need to ramp up its cloud spending – which could dent its margins.

Alphabet’s stock trades at a reasonable 27 times forward earnings, but it’s easy to see why the bulls didn’t love this stock as much as Zoom.

The verdict

Alphabet is still a sound long-term investment, but I believe Zoom will generate bigger gains over the following year for one simple reason: The COVID-19 pandemic is far from over, and a second wave of infections could shut down businesses and send people home again.

Therefore, Wall Street’s estimates could be too low for Zoom and too high for Alphabet, which will suffer slower ad growth if the pandemic worsens. Zoom’s premium valuation would be justified in this scenario, while Alphabet would deserve to trade at a much lower multiple.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

See The 5 Stocks

*Returns as of June 30th

More reading

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Amazon, Cisco Systems, and Facebook. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, Microsoft, and Zoom Video Communications and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, and Zoom Video Communications. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Better buy: Zoom Video Communications vs. Alphabet appeared first on Motley Fool Australia.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!