Cheap shares are hard to come by, but this tech stock is looking like a bargain to me. Why is that? Well, it’s all about the changing world we live in.
The pandemic has created a semi-permanent shift in the average working lifestyle. Due to safety concerns, many employees are now working from home. Yes, the announcement of multiple vaccines means the pandemic may be over soon. However, an estimated 25%-30% of people will continue working from home even after Covid-19 becomes a chapter in the history books.
That actually makes a lot of sense from a business point of view. Many employees can do their job as effectively from home. In that case, there’s no need to spend money renting costly offices.
Video conferencing tech stocks in the pandemic
Tech stocks like Zoom Video Communications have flourished under current market conditions. The sudden need for remote working solutions resulted in a mass migration to such platforms, allowing the company to grow extra fast.
Zoom’s share price has risen by over 440% since the start of the year. Needless to say, it has been an excellent year for existing shareholders. But with such rapid growth, comes an absurdly high valuation. The P/E ratio is currently over 300. To put that in perspective, the historical market average P/E ratio is around 15.
But Zoom isn’t the only player in the space, and that’s where the cheap shares of LoopUp Group (LSE:LOOP) come in.
Much like Zoom, LoopUp offers a video conferencing platform to businesses. Unlike Zoom though, the firm is specifically targeting the professional services (PS) market. This includes the legal, financial, and client-led business sectors. The market niche is undoubtedly smaller than the overall mass market. But, as a result, it’s facing far fewer direct competitors.
What’s going on with the share price?
I’ve previously discussed how I think LoopUp can succeed in this market space. Since that article, the shares haven’t done very well, falling by nearly 55%.
The catalyst behind this decline is a trading update in which earnings guidance was lowered for the year. As previously mentioned, the business primarily focuses on the PS market. But it does still offer some legacy products for the mass market, despite transitioning out of that segment.
Covid-19 boosted the demand for these legacy products. Unfortunately, they’re very similar to what Zoom offers at a lower price. Thus, in an attempt to retain customers, LoopUp had to lower its fees, and with it, earnings expectations declined.
Are they cheap shares or a value trap?
The legacy product problem is a little concerning. It demonstrates the lack of pricing power the firm has over the mass market. Furthermore, I think this also may have further contributed to the rapid decline in the share price.
However, don’t forget that the core focus of LoopUp is not the mass consumer market. A closer look at the results showed some rather superb performances elsewhere. Total PS-based minute volumes were up 43%, with a 56% increase in average minutes-per-user.
Overall, the tech stock is expecting 18% growth in total revenue and 134% in underlying profits for 2020. Based on these figures, the shares look incredibly cheap to me at a forecast P/E ratio of around 3.
Zaven Boyrazian owns shares in Zoom Video Communications. The Motley Fool UK has recommended LoopUp Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.