Perhaps no company is more emblematic of the pandemic's impact on the stock market than Zoom Video Communications (ZM 0.15%). After going public in April of 2019, Zoom ended that year up only 9.7%, compared to the S&P 500's 12.8% return over that same time frame. However, 2020 told a different story. With the pandemic forcing all of our interactions online, Zoom became a household name and the stock ended 2020 up 444% from its initial public offering. Since then, Zoom's stock is down 67% and is now trading around where it was at the beginning of the pandemic.
Amidst all this stock volatility, Zoom has consistently produced strong business results, and the recent sell-off has made shares much more affordable. With a recent earnings report providing an update on the business, let's take a look to see if Zoom stock is a buy now.
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Strong growth continues
Zoom's recent earnings release was for Q3 of the fiscal year 2023, ending April 30, 2022. Revenue for the quarter was $1.1 billion, up 12% year over year. While that growth may not appear impressive at first glance, it's important to remember that it was on top of 191% growth in Q3 of 2022. As Zoom laps the quarters where the pandemic had its greatest impact on revenue, growth numbers will appear lower than what investors may be used to.
This deceleration in year-over-year revenue growth was to be expected. What's going to be important to watch moving forward are the customer metrics that Zoom reports. Q3 ended with 198,900 enterprise customers, a 24% increase year over year. These customers also had a net dollar expansion rate of 123%, meaning they spent 23% more this year than last. Another important cohort, customers contributing more than $100,000 in revenue, grew 46% to 2,916. Zoom is clearly providing products that customers see value in, and they're responding by spending more each year.
Zoom is also a cash generation machine. It produced over $500 million in free cash flow in Q3 and ended the quarter with $5.7 billion in cash, cash equivalents, and marketable securities on its balance sheet. This cash balance allows Zoom to make investments in the products that attract new customers and drive the company's impressive net dollar expansion rate.
Where does Zoom go from here?
While Zoom's Q3 results are impressive, investors should be aware that some of these metrics are slowing from where they were over the past few quarters. For example, while Zoom's net dollar retention rate for enterprise customers is very strong at 123%, that metric was 130% as recently as two quarters ago. Similarly, Zoom's enterprise customer growth of 24% was the lowest it's been in the past five quarters.
As mentioned above, all of these metrics were bound to slow after Zoom pulled forward so much growth over the past few years. It remains to be seen what growth looks like in the coming quarters and years as the business normalizes. However, even if the results from this quarter continue to hold steady into the future, that level of business performance would still be impressive.
So is Zoom a buy now?
When Zoom was growing revenue in the triple digits during 2020 and 2021, the market had the stock priced as if that growth would never slow. While that was exciting if you were a shareholder, it made buying shares at that time a dicey proposition. On the flip side, the stock is now priced more reasonably, if not undervalued, for what's likely to be Zoom's business performance going forward.
As of this writing, Zoom trades for 27 times earnings, only slightly above the S&P 500's multiple of 24. While that wouldn't be considered cheap, it is the lowest price-to-earnings multiple that Zoom has had since its IPO. For investors who believe Zoom's strong results can continue for years to come, now might be the time to pick up some shares at a discount.
