Zoom (ZM 1.57%) was one of investors' favorite stocks in earlier phases of the pandemic. Its video communication platform became a household name as millions of in-person events and meetings moved to the digital space. Sales and earnings soared thanks to the rising user base.
But that Wall Street optimism has reversed in recent months on fears about where growth trends will settle now that social distancing is ending.
Let's look at a few reasons why investors are so nervous heading into the Q1 report for fiscal 2023 on May 23.
The growth hangover
Zoom expanded sales at a fantastic rate for fiscal year 2022 (12-month period ending Jan. 31), with revenue rising 55% to $4.1 billion. For context, the platform was generating just $330 million annually in 2019, before the pandemic struck.
The problem is that sales trends are slowing now that much of the world is returning to in-person interactions. Zoom reported just a 21% sales increase in Q4, and most investors who follow the stock are looking for revenue to land at $1.1 billion this quarter, representing just 11% growth year over year.
The bigger concern is that Zoom will struggle to post revenue growth at all for the full year as enterprises scale back on digital meetings. Watch engagement metrics like customer growth for signs of weakness here. Zoom also needs to convince existing customers to pay more for additional services if it wants to keep growing quickly.
Those wins show up in Zoom's net dollar expansion rate, which describes average contract sizes for renewing clients. The metric has been running comfortably above 120% for the past year but could start declining in 2022.
Cash flow and margins
Since it provides a digital service, Zoom doesn't face as much inflation and supply chain pressure. Yet its profitability, which rose to 26% of sales last year from 25% (in fiscal 2021), could still drop as sales growth slows and as the company pours more resources into developers' salaries, marketing, and R&D. Keep an eye on operating income on Monday to see if Zoom is struggling in this area.
Cash flow might paint a better picture of the company's financial strength. That metric improved to $1.6 billion last year from $1.5 billion a year earlier. Investors are concerned that these gains will end, or reverse slightly, in 2022.
The main fear heading into Monday is that Zoom will lower its fiscal year outlook. That forecast currently calls for sales to land at about $4.5 billion, representing 10% gains. Adjusted earnings are predicted to fall to about $4.50 per share from $5.23 per share.
CEO Eric Yuan and his team might reduce those forecasts slightly to reflect slowing economic growth and a continued shift away from digital meeting spaces. But they're likely to affirm a bullish wider outlook as demand rises in the remote working niche.
The problem is that the aftermath of the pandemic is making it harder for investors to estimate Zoom's long-term potential, and that uncertainty implies more volatility in the stock price ahead.