What Is Zoom's Long-Term Growth Trajectory?

With ample cash flow from operations, Zoom (ZM 2.13%) currently has the ability to try new technologies and new ways to improve its overall solutions. In this Motley Fool Live segment from "The Virtual Opportunities Show," recorded on March 1, Fool.com contributors Travis Hoium, Rachel Warren, Jose Najarro, and Demitri Kalogeropoulos discuss how this and other factors could affect Zoom's stock over the long term. 

Travis Hoium: Zoom reported an earnings. Stock is down about 5 percent literally 5 percent today in trading. Interesting report from them. Zoom is one of these companies that I don't know exactly what to think about coming out of the pandemic. I think we're seeing this with a lot of growth stocks and I was like, did really well during 2020 and 2021. We've talked about pulling forward business. If you're going to average growth of 15 percent a year and you pull a bunch of that forward. Where you're going to end up doing is, you're going to have extremely high growth for a short period of time and then it's going to fall off. Your growth rate is going to fall off. But you don't know how long that falloff is going to happen and when are you going to get to a more normal growth rate. That's what we're seeing with Zoom right now.

Fourth-quarter revenue, $1.07 billion up 21 percent from a year-ago, and for the full-year revenue is up 55 percent to 4.1 billion. Those numbers sound great. Q1 guidance for this fiscal year. Basically flat revenue, sequentially. Flat from the fourth quarter to the first quarter. For the full year, they're expecting basically 4.5 billion, so up around 10 percent for the year. This is a company they're expecting earnings of $3.45 to $3.51 so at the high end of that, you're talking about a stock trading at 36 times earnings. Now, if this is a company growing at 55 percent per year, that's a really cheap price to pay for a stock growing that fast. If this is a stock that's growing zero percent per year, that's a lot to pay for a stock like that. Zoom is somewhere in the middle, but I don't know where it is in the middle of that range.

I think that what's a little bit tough for everybody to decipher as we look at our earnings right now is what is the long-term growth rate for a company like Zoom, especially as everybody gets into video conferencing, whether it's Microsoft Teams or Google Meet, any of these larger platforms. Is Zoom going to be able to compete long term. Yes, I know if you guys had a chance to look at the numbers a little bit, but I've been curious about your thoughts on what the future of Zoom is, is it the trough in growth going to continue or where are we headed?

Rachel Warren: I can jump in. I really like this company, and I'm an investor. It's been a bumpy ride in recent months to put it mildly. But I haven't had a chance to look too deeply. I think what you mentioned about what is that long term growth going to look like? I think the company can study. I think it has a lot of strong potential, but I do think a lot of the volatility we've been seeing with the stock is exactly that. A lot of investors trying to figure out, OK, what is its long-term growth trajectory and how are we supposed to value it? I mean, that revenue growth is looking really good. Bottom line is good. It's doing great in terms of cash and revenue is at 55 percent year-over-year for the full-year 2022.

For me personally, it's one I'm not selling, I'm holding on to it and just being patient with it. I think one of the things that's really strengthening soon as they have a really strong customer retention rate. They have done really well and continuing to diversify their various business lines and attract new customers. But I do think the growth is going to be slower than we saw earlier in the pandemic. I don't know that it's going to return to that at least in the near future. Not saying it can't. I think it's one of those that I, for example, as an investor I've had to normalize my expectations. I still think the business is great and I think it's a quality stock, which is why I'm still holding on to it. But I'm definitely not expecting those same levels of growth, at least in the near future that I think we would have seen in 2020 or even a year ago.

Jose Najarro: I want to say one of my favorite things about Zoom is just the amount of cash flow from operations. I was taking a quick look. Total revenue was about 1 billion, a little bit over 1 billion. Cash flow was about 209 million, just this quarter alone. Even though right now they're just pretty much right of video company, but with that cash flow, they are able to try new technologies, new ways to improve their overall solutions. I mean, I'm looking at the numbers, but I thought I saw that their foods Zoom phone is still doing great numbers and still seeing strong growth there. With things like more interactive meetings, things like Microsoft and I think might have been talking about. Zoom right now can continue to develop technologies with similar solutions.

Demitri Kalogeropoulos: I am going to be watching this material. Travis, you're not alone, I think in the study of looking at Zoom and like, what am I looking at here? Because I don't think there's any comparable thing that I could think of a company that was doing less than $500 million in sales before the pandemic 2019 and now there are a $4 billion a year business within a year they just did that. They're not going backwards, they're calling for flat results, but still, that's insane. I don't know. I can't think of a parallel to that. That's profitable and it was profitable that whole time. You would think that there is a lot of opportunity there to move on that but there's that big question of what are you going to do next?

Travis Hoium: I do want to add that as we look at growth stocks that have really pulled back, I think Jose brought up something really important, is that, there's a difference between a growth stock that is losing hundreds, millions of dollars a year, pulling back 70, 80 percent and investors adjusting expectations and thinking that's a value versus having this unknown cash-flow future, and a stock that has pulled back. Zoom has it. I don't know exactly what the number on the pullback is from a tie it but, it's a cash flow positive business like Jose mentioned. Whatever hiccups they're going to go through this year and an adjustment in that growth rate, it is still a solid company. There is a solid company behind it. That doesn't mean that we're at the bottom from a stock perspective, but it does mean that from an operations perspective, they are still doing very well and there's still cash coming in the door. It isn't that top tier of stocks that have gotten beaten up over the last six months to a year.