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    Home » Is There An Opportunity With Zoom Communications Inc.’s (NASDAQ:ZM) 36% Undervaluation?
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    Is There An Opportunity With Zoom Communications Inc.’s (NASDAQ:ZM) 36% Undervaluation?

    userBy userJuly 3, 2025No Comments7 Mins Read
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    • The projected fair value for Zoom Communications is US$122 based on 2 Stage Free Cash Flow to Equity

    • Zoom Communications’ US$77.59 share price signals that it might be 36% undervalued

    • Our fair value estimate is 34% higher than Zoom Communications’ analyst price target of US$90.83

    How far off is Zoom Communications Inc. (NASDAQ:ZM) from its intrinsic value? Using the most recent financial data, we’ll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today’s value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!

    Remember though, that there are many ways to estimate a company’s value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

    AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part – they are all under $10bn in marketcap – there is still time to get in early.

    We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

    A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:

    2026

    2027

    2028

    2029

    2030

    2031

    2032

    2033

    2034

    2035

    Levered FCF ($, Millions)

    US$1.71b

    US$1.81b

    US$1.89b

    US$1.83b

    US$2.04b

    US$2.10b

    US$2.16b

    US$2.23b

    US$2.30b

    US$2.37b

    Growth Rate Estimate Source

    Analyst x18

    Analyst x16

    Analyst x9

    Analyst x4

    Analyst x4

    Est @ 3.14%

    Est @ 3.08%

    Est @ 3.04%

    Est @ 3.01%

    Est @ 2.99%

    Present Value ($, Millions) Discounted @ 7.8%

    US$1.6k

    US$1.6k

    US$1.5k

    US$1.4k

    US$1.4k

    US$1.3k

    US$1.3k

    US$1.2k

    US$1.2k

    US$1.1k

    (“Est” = FCF growth rate estimated by Simply Wall St)
    Present Value of 10-year Cash Flow (PVCF) = US$14b

    After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today’s value at a cost of equity of 7.8%.

    Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$2.4b× (1 + 2.9%) ÷ (7.8%– 2.9%) = US$50b

    Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$50b÷ ( 1 + 7.8%)10= US$23b

    The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$37b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$77.6, the company appears quite good value at a 36% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope – move a few degrees and end up in a different galaxy. Do keep this in mind.

    NasdaqGS:ZM Discounted Cash Flow July 3rd 2025

    Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at Zoom Communications as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we’ve used 7.8%, which is based on a levered beta of 1.130. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

    Check out our latest analysis for Zoom Communications

    Strength

    Weakness

    Opportunity

    Threat

    Although the valuation of a company is important, it ideally won’t be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company’s cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Zoom Communications, we’ve put together three important elements you should assess:

    1. Financial Health: Does ZM have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

    2. Future Earnings: How does ZM’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

    3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

    PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

    —

    Investing narratives with Fair Values

    View more featured narratives

    —

    Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

    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.



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