Better Buy: Zoom Video Communications vs. Microsoft

Both companies are enjoying strong growth. But is the new tech upstart or the veteran the superior investment choice?

Since last year's IPO, Zoom Video Communications (NASDAQ:ZM), the new kid on the tech block, has seen its share price rise to levels that rival the stock price of veteran tech titan Microsoft (NASDAQ:MSFT). The popularity of Zoom's videoconferencing platform powers its success.

Microsoft also offers a rapidly growing videoconferencing product, although it's ancillary to the company's core business. This speaks to the demand for videoconferencing in today's connected world, particularly after the coronavirus pandemic required working and schooling from home.

Comparing the tech upstart to the iconic veteran, which one is the better buy? Let's examine both to find out.

Zoom's success

Zoom's growth has been stellar on all fronts. It has lived up to its name, as revenue zoomed from $60.8 million in 2017 to $622.7 million for this most recent fiscal year, which ended Jan. 31.

Its business customers rose from 50,800 in fiscal year 2019 to 81,900 in 2020. The company nearly doubled the number of its biggest business customers in that same time frame, growing from 344 to 641 clients. These customers contributed 33% of Zoom's revenue in fiscal year 2020.

Zoom generates revenue using a software-as-a-service (SaaS) subscription model. The SaaS model allows Zoom to collect a recurring revenue stream while customers avoid forking over a large up-front sum to purchase software.

To its credit, Zoom's growth didn't lead to burning cash, as can happen with younger tech companies. Its financial health is excellent: At the end of this last fiscal year, it had $1.3 billion in total assets versus $455.9 million in total liabilities, and it generated free cash flow of $113.8 million.

When the company reports first-quarter earnings on June 2, growth should be impressive. The pandemic-induced global lockdowns forced organizations to transition to remote work. This led to the widespread adoption of videoconferencing platforms, including Zoom.

Revenue is expected to come in between $199 million and $201 million in the first quarter of fiscal 2021. Given the previous quarter's 78% year-over-year revenue increase to $188.3 million, and with shelter-at-home orders in place for much of the quarter, Zoom should easily meet or exceed the estimate.

After the pandemic, Zoom hopes to capitalize on its newfound popularity and continue to grow. It's not yet clear if remote work will still be as extensive as during the lockdown, but Zoom's success already makes it one of the top videoconferencing companies in the U.S.

Microsoft's strengths

Microsoft, like Zoom, is experiencing tremendous growth across its lines of business. Its Teams videoconferencing unit saw daily active users grow from 44 million in March to over 75 million a month later.

But shelter-at-home requirements didn't just lead to a boom for videoconferencing. Businesses and other institutions require the IT infrastructure to support remote workers, which helped Microsoft achieve 15% year-over-year revenue growth to $35 billion in the company's third quarter (which ended March 31).

Microsoft's cloud computing solutions are what drive the company's revenue today. Organizations in all industries are shifting technology infrastructure to the cloud using vendors such as Microsoft. The cloud computing market tripled in the past three years and is estimated to grow to $163 billion by 2021.

Microsoft's primary product line here is Azure, which grew 59% year over year in the company's third quarter. Its other cloud offerings include a version of its famous Office software suite, which saw 25% year-over-year revenue growth.

Microsoft's products don't end with cloud computing. Other offerings include its professional networking site LinkedIn, which grew revenue 21% year over year in Q3, and its Xbox video game platform, where revenue rose 2% and should grow further when its next-generation gaming console debuts in the fall.

Microsoft also pays a dividend, and its solid financials assure investors that the payout is safe amid an economic downturn that saw other companies slash or even stop dividends. The company had total assets of $285.4 billion compared to total liabilities of $170.9 billion at the end of Q3. It also generated free cash flow of $13.7 billion, up 25% from last year.

The final verdict

Both Zoom and Microsoft show excellent growth potential and financial health. If I had to choose one, the win goes to Microsoft.

Microsoft edges out Zoom because of its dividend and its success in cloud computing. It's a red-hot market with years of growth ahead as businesses, governments, and schools transition IT infrastructure to the cloud, and Microsoft is winning its share of this fast-growing market.