In this article, I have evaluated two technology stocks, Riot Platforms, Inc. (RIOT) and Zoom Video Communications, Inc (ZM), to determine the better investment. Comparing the fundamentals of these stocks, ZM appears to have better upside potential than RIOT for reasons explained throughout this article.
The market for digital transformation is predicted to grow at a 21% CAGR to $2.74 trillion by 2030, fuelled by changing customer expectations, competitive pressures, developing business models, operational efficiency, and sustainability.
As a result, the demand for technology services is expected to remain strong as enterprises invest heavily in digitizing their operations to improve their digital abilities. According to Gartner, IT services spending this year is expected to increase 5.5% year-over-year to $1.31 trillion.
Furthermore, investors’ interest in tech stocks is evident from the Technology Select Sector SPDR ETF’s (XLK) 43.2% returns year-to-date compared to S&P 500’s 17.3%.
In terms of price performance, RIOT is the clear winner. RIOT’s stock has gained 42.9% in price over the past three months compared to ZM’s 7.7% gain. In addition, RIOT’s stock has gained 77.7% over the past month, compared to ZM’s 4% gain.
However, here are the reasons why I think ZM could perform better in the near term:
Recent Positive Developments
On June 27, ZM announced the launch of the award-winning Intelligent Director for Zoom Rooms. For hybrid meetings with a Zoom Room, Intelligent Director uses AI and multiple cameras to provide the best image and angle of participants so remote participants can see each person clearly, even in large conference rooms.
Intelligent Director is specifically designed for medium- to larger-sized rooms and helps avoid the “bowling alley effect.” Intelligent Director can individually frame up to 16 participants in a Zoom Room using multiple cameras, choosing the best video stream via a Zoom-designed AI, and send that stream to the gallery view of the Zoom Meeting.
On May 16, ZM announced its partnership with and investment in Anthropic, a firm devoted to Artificial Intelligence (AI) safety and research. By integrating Anthropic’s AI assistant, Claude, to connect with ZM’s platform, the partnership would further strengthen ZM’s federated approach to AI.
Conversely, on June 26, RIOT announced that it had entered into a long-term purchase agreement with MicroBT Electronics Technology Co., LTD through its manufacturing subsidiaries, MicroBT, a prominent manufacturer of Bitcoin miners with production facilities in the United States.
Under the Agreement, Riot has secured an initial order of 33,280 next-generation Bitcoin miners from MicroBT. The miners will be produced by MicroBT in the United States for Riot’s Corsicana Facility for total consideration of $162.9 million, equating to approximately $21.50 per terahash (TH).
Recent Financial Results
RIOT’s total revenue for the first quarter ended March 31, 2023, declined 8.2% year-over-year to $73.24 million. Its adjusted EBITDA decreased 40.9% year-over-year to $7.50 million. The company’s net loss came in at $55.69 million, compared to a net income of $36.58 million in the year-ago quarter. Also, its adjusted EPS declined 60% year-over-year to $0.04.
During the fiscal 2024 first quarter that ended April 30, 2023, ZM’s revenue increased 2.9% year-over-year to $1.11 billion. Its gross profit grew 3.6% from the year-ago quarter to $841.42 million. Moreover, the company’s non-GAAP income from operations rose 5.7% from the prior year’s quarter to $422.32 million.
In addition, ZM’s non-GAAP net income came in at $353.25 million, up 11.9% year-over-year, while its non-GAAP EPS grew 12.6% year-over-year to $1.16.
Expected Financial Performance
Analysts expect RIOT’s EPS to remain negative in the to-be-announced quarter, current quarter, and current year 2023. Its revenue is expected to amount to $89.32 million in the to-be-announced quarter, $100.35 million in the current quarter, and $375 million in the current year, 2023.
On the other hand, ZM’s EPS is expected to come in at $1.06 in the current quarter, $1.03 in the next quarter, and $4.33 in the current year. The company is expected to report revenues of $1.11 billion in the current quarter, $1.12 billion in the next quarter, and $4.48 billion in the current year.
Profitability
ZM is more profitable, with a trailing-12-month gross profit margin of 75.08%, which is higher than RIOT’s 16.40%. ZM’s trailing-12-month levered FCF margin of 35.09% compares to RIOT’s negative 64.38%.
Furthermore, ZM’s trailing-12-month ROCE, ROTC, and ROTA of 0.09%, 0.67%, and 0.06% are higher than the RIOT’s negative 48.54%, 15.19%, and 48.13%, respectively.
Valuation
In terms of forward EV/Sales, ZM is currently trading at 3.46x, lower than RIOT’s 8.72x. ZM’s forward Price/Sales ratio of 4.68x is lower than RIOT’s 9.08x.
Thus, ZM is relatively affordable.
POWR Ratings
RIOT has an overall rating of F, which equates to a Strong Sell in our proprietary POWR Ratings system. On the other hand, ZM has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. RIOT has an F grade for Value. RIOT’s forward EV/EBITDA multiple of 33.75 is 124.5% higher than the industry average of 15.03.
However, ZM has a B for Value. Its forward EV/EBITDA multiple of 8.87 is 41% lower than the industry average of 15.03.
In the 80-stock Technology – Services industry, RIOT is ranked last, while ZM is ranked #16.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, Quality, and Sentiment. Click here to view RIOT’s ratings. Get all the ratings of ZM here.
The Winner
The increasing investments in digitization and the widespread adoption of advanced technologies such as artificial intelligence (AI), blockchain, and the Internet of Things (IoT) have led to a significant surge in demand for technology services. This trend is expected to continue and even accelerate in the coming years.
However, increasing scrutiny from U.S. regulators on the cryptocurrency industry continues to be a significant headwind for RIOT.
Moreover, RIOT’s grim financial performance, elevated valuations, and low-profit margins suggest ZM could be the better choice now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Technology – Services industry here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
ZM shares were trading at $72.67 per share on Tuesday morning, down $0.17 (-0.23%). Year-to-date, ZM has gained 7.28%, versus a 18.96% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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