Zoom Video Communications (ZM 0.95%) was one of the biggest beneficiaries of the pandemic-driven lockdowns and restrictions that drove millions out of the office. There's plenty of competition in the videoconferencing market, but Zoom's ease of use helped it stand out. For companies urgently going remote last year, Zoom was the path of least resistance.

With Zoom becoming a necessity for many companies during the pandemic, revenue has soared. Zoom just booked its first quarter with over $1 billion of . Two years ago, quarterly revenue was below $200 million. Zoom now has over half a million customers with more than 10 employees, and over 2,000 customers spending more than $100,000 on Zoom's products.

Zoom is still reporting solid growth on a year-over-year basis. Revenue was up 54% in the latest quarter, and the company's guidance represents year-over-year growth of about 31%. But the company is reaching an inflection point. Sequential growth has been slowing for a while, and it's about to turn negative for the first time if Zoom hits its guidance.

A chart showing Zoom's sequential revenue growth.

*Q3 2022 figure is the midpoint of Zoom's revenue guidance. Chart by author. Data source: Zoom.

Small customers are jumping ship

Zoom is still seeing solid demand among large enterprise customers. The number of enterprise customers spending more than $1 million annually soared 77% in the latest quarter, and the number of customers spending more than $100,000 annually more than tripled. Additional products like Zoom Phone are helping to drive revenue higher among large customers.

It's a different story for customers with fewer than 10 employees. Zoom attributed its lackluster guidance, which called for revenue between $1.015 billion and $1.020 billion in the fiscal third quarter, on small customers. Even at the high end of that range, revenue will be down compared to the second quarter.

Small customers account for 36% of Zoom's revenue, and the company expects this part of its business to be volatile as the pandemic ends. "[O]ur outlook assumes that our direct and channel business will continue to experience robust growth, while our online business will be a headwind in the coming quarters as smaller customers and consumers adjust to the evolving environment," said CFO Kelly Steckelberg during the second-quarter earnings call.

Large customers are also changing their behavior. While enterprises were quick to adopt Zoom last year, they're starting to take their time. "They're doing more complete like proof of concepts, for example, versus if you think about a year ago, they were in this sort of stage of trying to keep the lights on almost and buying very quickly," said Steckelberg.

A Zoom meeting on a laptop.

Image source: Zoom.

A tough road ahead for Zoom stock

Videoconferencing software isn't going away, but it's not going to be an absolute necessity once the pandemic is over. Small customers are starting to drop Zoom, and large customers are no longer adopting Zoom with the same urgency. Enterprises are taking their time and probably considering alternatives, something that probably wasn't happening much last year.

The worst-case scenario for Zoom is a period of declining revenue as some of its pandemic-era growth is unwound. Within a few quarters, revenue could start declining on a year-over-year basis. Acquisitions can help, but the core business is facing some tough headwinds.

Zoom expects to produce around $4 billion of revenue this fiscal year. Revenue could very well decline next fiscal year if enterprise growth can't overcome the loss of revenue from small customers.

Zoom is still worth about $90 billion after its post-earnings slump. The price-to-sales ratio based on the full-year guidance is around 22. If Zoom starts reporting revenue declines, that premium valuation may come under some serious pressure.