Where Will Zoom Video Communications Be in 3 Years?

Zoom Video Communications (ZM +0.78%) has gone on a wild ride since its IPO in April 2019. The video conferencing company went public at $36 per share, and its shares started trading at $65 on the first day.

Zoom's stock subsequently skyrocketed in 2020 as its brand became synonymous with video calls throughout the pandemic, and its shares hit an all-time high of $588.84 that October. That rally briefly boosted Zoom's market cap to $162 billion -- more than 60 times the revenue it would generate in fiscal 2021 (which ended in Jan. 2021). That nosebleed valuation was unsustainable, and Zoom's stock eventually tumbled back to the low $170s.

Zoom has still generated impressive gains for investors who bought the stock nearly three years ago. However, it also burned a lot of latecomers, with a decline of roughly 50% over the past 12 months. Could Zoom's stock rebound over the next three years and hit fresh highs again?

Image source: Zoom

What will the next three years look like for Zoom?

Zoom had already been growing rapidly prior to the pandemic, but its growth accelerated to unforeseen levels throughout the crisis.

Data source: Zoom. YOY = Year-over-year.

But that growth also set Zoom up for very difficult year-over-year comparisons in a post-lockdown world. Here's how rough that slowdown might be, according to analysts polled by S&P Global Market Intelligence.

Data source: Zoom. Source: S&P Global Market Intelligence. 

We should take those estimates with a grain of salt, but three headwinds will likely cause that slowdown. First, fewer people will work remotely or attend online classes as governments ease their lockdown measures.

Second, Microsoft's (MSFT 1.33%) Teams, which is integrated with its Office 365 productivity services, could pull enterprise users away from Zoom. As of Microsoft's latest quarter, 138 organizations had over 100,000 Teams users, and more than 3,000 organizations had over 10,000 Teams users.

Lastly, a growing number of competitors -- including Cisco's Webex, Alphabet's Google Meet, and Meta's Facebook Messenger Rooms -- could fragment the market as its growth decelerates in a post-lockdown market.

Zoom' valuation is pegged to its evolution

If Zoom can consistently generate 10% to 20% annual revenue and earnings growth over the next decade, its stock might seem reasonably valued today at 11 times next year's sales. But to maintain that stable growth, Zoom will need to expand and diversify its ecosystem.

Zoom tried to buy the cloud communications company Five9 (FIVN 0.45%) last year to kick-start that diversification, but the deal was abandoned after Five9's investors rejected Zoom's $14.7 billion bid.

However, Zoom has also recently launched new services for live events, dedicated hardware devices for Zoom calls, and added the audio-only Zoom Phone platform to replace traditional phone networks and numbers. It also recently integrated its video calls into Facebook's Portal, Google's Nest Hub Max, and Amazon's Fire TV devices. 

Zoom's recent test of post-video ads on its free tier suggests it could soon monetize the tens of millions of free (and unprofitable) users it gained throughout the pandemic. That push could enable Zoom to build a new digital advertising business to complement its subscription-based business.

Its multibagger days might be over

Zoom's new initiatives indicate it isn't sitting still as it faces tough year-over-year comparisons. If it can capitalize on the momentum and brand recognition it gained during the pandemic to launch new products and services it might just evolve into a more diversified cloud-based communications software company over the next three years.

But based on Zoom's projected growth rates and valuations, it probably won't replicate its post-IPO gains by the end of 2024. It might be trading a bit higher by then, but I doubt it will generate the same multibagger gains while only growing its annual revenues at rates in the mid-to-high-teens.