The novel coronavirus pandemic and the actions taken by governments around the world to slow the spread of the virus are taking a huge toll on a wide variety of businesses. Few companies will escape completely unscathed. The U.S. economy will likely suffer a historically large contraction during the second quarter, with some analysts calling for a 25% decline in gross domestic product.
Some stocks have surged throughout this crisis as an increasing number of people are forced to work from home. Zoom Video Communications (NASDAQ:ZM) is a popular one, with investors getting behind the stock due to rising demand for video conferencing software.
The problem with Zoom, though, is that the valuation is about as nonsensical as they come. The company is now valued at nearly $44 billion, despite the entire video conferencing market being worth just a small fraction of that total. Shares trade for more than 60 times sales, an eye-watering ratio.
Whether soaring demand for various work-from-home products like video conferencing software sticks around after the pandemic is over remains to be seen. A pricey stock like Zoom could very well collapse if newer customers turn out to be transient, even if the company itself continues to perform well. Zoom is a classic case of a good company, but a bad stock.
How can you invest in the work-from-home trend without taking huge risks? Cisco Systems (NASDAQ:CSCO) is your best bet.
Like Zoom, Cisco provides video conferencing technology through its WebEx business. WebEx isn't a household name, while Zoom appears to be becoming one, but Cisco is seeing a surge in demand, nonetheless.
Earlier this month, Cisco CEO Chuck Robbins disclosed in an interview that WebEx had powered 5.5 billion meeting minutes in the first 11 business days of March. Robbins also said that the platform is doing four to five times the volume it was built for a month ago. At peak times, volume is 24 times higher than normal.
Cisco is also a big name in cybersecurity. While spending on cybersecurity hardware, software, and services has been growing steadily in recent years, the sudden explosion in remote workers raises new security challenges for companies and organizations.
Cisco expanded some of its free security offerings in March, a move that could lead to more business down the road as the company converts users to paying customers. In the first 24 hours after launching its free security offers and its free WebEx offers, around 240,000 new users had signed up for at least one of them.
Beyond video conferencing and security, Cisco is the market leader in enterprise networking hardware. The company's switches and routers are key Internet infrastructure, and Internet usage is rising in places subject to stay-at-home orders. Increased demand for streaming, online gaming, video conferencing, and other applications could eventually lead service providers to increase capacity, boosting hardware sales in the process.
A rock-solid work-from-home stock
Cisco is well positioned, in multiple ways, for an increase in people working from home. However, a global recession will almost certainty hurt the company's results as some customers delay or pull back on orders where they can. Cisco is sensitive to global economic uncertainty, and its core business is prone to cycles.
It's impossible to say how Cisco will perform this year, given the high level of uncertainty. The best-case scenario: Increased demand related to work-from-home is enough to offset any other sources of weakness. The worst-case scenario: It's not enough, and revenue slumps, possibly by a lot.
Cisco stock is down more than 30% from its 52-week high. It trades for less than 13 times fiscal 2019 adjusted earnings per share. Earnings could take a hit this year, depending on how things go. But for long-term investors, paying such a low price for a rock-solid tech company is unlikely to turn out badly if your time horizon is measured in years.
Timothy Green owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Zoom Video Communications and recommends the following options: short May 2020 $120 calls on Zoom Video Communications. The Motley Fool has a disclosure policy.