Shares of early pandemic darling Zoom Video Communications (ZM 1.78%) have begun to show signs of life again in recent weeks. Shares have rebounded 24% since the company provided an update on its fiscal 2023 first-quarter financials on May 23 -- though they remain some 80% off their all-time high.
The reason for the pop has a lot to do with Zoom upgrading its projection for profit in the next year. After a horrific nearly two-year run for Zoom stock after peaking in late 2020, I'm still interested in nibbling here.
Image source: Getty Images.
Zoom going back to the moon?
Growth investor Cathie Wood and her investment firm, ARK Invest, released some wild 2026 price targets for Zoom subsequent to the first-quarter report. ARK is calling for $700 per share in a bear-case scenario, implying a more than 500% return from current levels. An even loftier prediction has Zoom at $2,000 per share by 2026.
A "worst-case scenario" return of 500% seems, well ... way off. Things can always go from bad to worse, especially in a world that rewards you one minute for having the right service at the right time (digital video during economic lockdowns), only to punish you the next minute (digital video during economic reopening). Personally, my worst bear-case scenario for Zoom is a negative return over the next few years (due to plenty of competition and stagnating revenue growth).
Nevertheless, I still like Zoom's strategy right now as it goes after corporate accounts with employees who could use video conferencing. After all, if executed correctly, virtual meetings can be far more efficient than in-person meetings and save a business substantial costs in travel. Even as the pandemic eases, I don't think business travel will ever be the same, thanks to Zoom.
Over two years after the COVID-19 panic started, Zoom's large customer count is still rising at a healthy clip. For the fiscal first quarter, Zoom reported a 46% year-over-year increase in customers spending at least $100,000 in the trailing 12-month period.
In this market, it's all about the bottom line
Of course, Zoom's Achilles heel at the moment is that the jump in larger business subscribers is being offset by smaller businesses and individual users letting their subscriptions go. As a result, revenue increased just 12% year over year for the quarter. The outlook for the balance of the year is for revenue to rise about 10% to 11%.
That slowing growth is OK, though. Investors want profits in this market dominated by inflation and a hyper-focus on the Federal Reserve's interest rate hikes to tame price increases. And Zoom is upping its game on that front. Management said it now expects full-year adjusted earnings per share to be between $3.70 and $3.77 based on a total share count of 309 million. Previously, it said to expect adjusted earnings of $3.45 to $3.51 based on about 312 million shares outstanding.
In other words, Zoom raised its outlook for profitability while simultaneously cutting the number of shares it expects to issue (via stock-based compensation to employees). Based on the new guidance, Zoom stock trades for about 29 times expected current-year adjusted earnings. Or if you prefer, the stock trades for 23 times trailing-12-month free cash flow and at about 24 times analyst expectations for current-year free cash flow.
Zoom is still undergoing some difficult year-over-year comparisons, and smaller subscribers are still leaving the service as their daily activity gradually normalizes. But at this valuation and with the (reasonable) expectation for steady but slower revenue growth over the next few years, I plan to keep picking up a few shares of Zoom to add to my existing position.
