Is Zoom Video Communications Stock a Buy Now? | Panda Anku

Zoom video communication(ZM -16.54%) The stock fell 8% during after-hours trading on Aug. 22 following the release of its second-quarter earnings report. The company’s video conferencing platform revenue rose 8% year over year to $1.1 billion, missing analyst estimates by $20 million. Adjusted net income fell 22% to $323 million, or $1.05 per share, but beat consensus guidance by $0.12.

Those headlines were mixed, but most investors were already expecting Zoom’s growth to slow significantly after it recovered from its pandemic-era growth spurt. The stock is also down over 80% since hitting its all-time high in October 2020, and it now appears more reasonably valued at 24 times its adjusted earnings guidance for this year. Let’s see if Zoom’s business stabilizes and if its run-down stock is finally worth buying.

Image source: Zoom.

Triple digit to single digit growth

Zoom’s revenue grew 326% to $2.65 billion in fiscal 2021, which ended in January of the calendar year. Remote working, online learning and stay-at-home trends have been the main drivers of this growth during the pandemic.

But in fiscal 2022, after lockdown measures ended, revenue grew just 55% to $4.10 billion. On a quarterly basis, year-over-year revenue growth cooled quickly from triple-digit to single-digit rates.

Period

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

revenue

$1.02 billion

$1.05 billion

$1.07 billion

$1.07 billion

$1.10 billion

Growth (YOY)

54%

35%

21%

12%

8th%

Data source: Zoom. YOY = year over year.

Zoom expects its third-quarter revenue to grow just 4% to 5% year over year, compared to analysts’ expectations of nearly 7% growth, and for it to be nearly flat sequentially. For the full year, the company expects sales to grow just 7%, which also misses the consensus forecast of 11% growth.

Those prospects seem bleak, but Zoom is likely still growing faster than other legacy video conferencing platforms. For example, Cisco systems(CSCO -0.63%) The collaboration segment — which houses Zoom’s rival Webex — saw its revenue decline 5% in fiscal 2022 (which ended in July).

Slowing growth in high-value customers

Zoom has gained many free users during the pandemic. It’s a double-edged sword, as it’s building its brand awareness but squeezing its margins through higher cloud hosting costs.

To actually grow its revenue, Zoom needs to upgrade its free users to paid plans that remove time limits on its meetings, allow more attendees to attend, and provide additional cloud-based storage services and collaboration tools. However, Zoom’s growth has also slowed among higher-value customers, which generate more than $100,000 in revenue over the trailing 12 months.

Period

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

High-value* customers

2,278

2,507

2,725

2,916

3.116

Growth (YOY)

131%

94%

66%

46%

37%

Data source: Zoom. * Over $100,000 in TTM revenue generated.

expanding its ecosystem

To attract more paying customers, Zoom has expanded its ecosystem with newer enterprise-grade features, including its Zoom Phone for audio-only calls, Zoom Rooms for a hybrid mix of on-site and remote participants in conference rooms, its Zoom Contact Center for in-office and Customer Service Communications and its Zoom IQ platform for managing video-based sales pitches.

During the earnings call, CFO Kelly Steckelberg said Zoom Phone was the “true star” of the second quarter as the “number of customers with 10,000 or more paid licenses grew 112% year over year.” She also said that Zoom Contact Center and Zoom IQ “gained traction early on.”

These green shoots indicate that Zoom is evolving into a more diversified communications platform, but this development could change its collision course with larger enterprise platforms such as Google. B. accelerate Microsoft (MSFT -0.47%) teams and Foreclosure (CRM -0.55%). As such, Zoom may need to make some acquisitions to broaden its competitive edge over these formidable rivals, especially after attempting to buy the cloud-based contact center provider five9 (FIVN -3.82%) for $14.7 billion collapsed last September.

Stable gross margins, shrinking operating margins

Zoom’s adjusted gross and operating margins also paint a mixed picture of its future:

Period

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

gross margin

76.2%

76%

78.3%

78.6%

78.9%

operating margin

41.6%

39.1%

39.2%

37.2%

35.8%

Data source: Zoom. Non-GAAP.

Gross margins have stabilized as the company has expanded its cloud services and data centers, but its operating margins have fallen as rising R&D and marketing costs have consistently outpaced slowing revenue growth. As a result, Zoom expects its adjusted earnings per share to fall 25% to 26% year over year for the third quarter and 27% to 28% for the full year.

It’s not the right time to buy Zoom

Zoom’s revenue growth is still slowing and operating margins will remain under pressure as the company expands its ecosystem to attract more enterprise customers. As a result, Zoom’s stock might look a little cheaper than it did in 2020, but it still can’t be considered a bargain — especially when you can buy many other stable software stocks (including Microsoft) at comparable valuations.

Leo Sun holds positions at Salesforce, Inc. The Motley Fool holds positions at and recommends Cisco Systems, Five9, Microsoft, Salesforce, Inc., and Zoom Video Communications. The Motley Fool has a disclosure policy.

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