It's been a terrible experience for anyone who has opted to purchase Zoom Video Communications (ZM 1.37%) stock since the summer of 2020. The stock is down nearly 80% from its all-time high notched about halfway through the first year of the pandemic. Since then, it's been unwinding as revenue growth for the company has slowly moderated along with easing restrictions and gradual reopening of the economy. Investors remain unimpressed despite a solid fourth-quarter fiscal 2022 earnings report (for the three months ended Jan. 31, 2022). But Zoom stock will eventually reach a bottom and return to growth if the business continues to expand.
Another cool-off is coming
The stock's modest post-earnings sell-off had more to do with future outlook (revenue increased 21% year over year). Revenue for the fiscal first quarter and full year 2023 is expected to rise just 12% and 11%, respectively. That's a far cry from the 326% and 55% increase in sales during the first two years of the COVID-19 pandemic.
The blame for this fast cooldown in growth trajectory can likely be levied against tiny businesses and individual users. As households have begun traveling again and returning to work, the need for a Zoom subscription becomes less compelling.
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Nevertheless, there is some good news here. Zoom continues to report solid traction among its larger business and enterprise users. In Q4, Zoom said it had 191,000 enterprise customers, a 35% increase from a year ago. Net dollar expansion rate for those customers was 130%, implying an average 30% increase in payments made to Zoom. Clearly, big business thinks video conferencing is a valuable tool for its workforce as the remote and hybrid work model is sticking around.
Is the stock a buy?
If Zoom can keep up its momentum among larger businesses, revenue growth could eventually reaccelerate as fewer individual subscribers falling off the wagon weigh down the company's traction among big enterprises. Zoom has in fact been doubling down on its highest-paying customer base. It launched its contact center solution late last year (recently renamed Zoom Contact Center) to integrate video conferencing with a business's other communications tools like phone and text.
And along the way, Zoom has remained highly profitable. Free cash flow was $1.47 billion last year, good for a very healthy free-cash-flow profit margin of 36%. The company ended the year with $5.42 billion in cash and short-term investments and no debt, prompting the initiation of a share-repurchase program of up to $1 billion through early 2024.
Now trading for about 21 times trailing-12-month free-cash-flow-to-enterprise value, Zoom is priced more like a value stock than a high-flying cloud software outfit. Given that revenue continues to moderate, that makes sense. However, unsubscribing individual users are masking strong big business subscriber metrics. It could take more time for Zoom to prove it's still a fast-growing cloud stock, but if you believe video conferencing tools are here to stay, Zoom shares are still worth nibbling on at this juncture.
