Is Zoom Video Communications Stock a Buy Now?

Zoom Video Communications' (ZM -0.99%) stock price fell 8% during after-hours trading on Aug. 22 following the release of its second-quarter earnings report. The video conferencing platform company's revenue rose 8% year over year to $1.1 billion, which missed analysts' estimates by $20 million. Its adjusted net income declined 22% to $323 million, or $1.05 per share, but cleared the consensus forecast by $0.12.

Those headline numbers were mixed, but most investors had already expected Zoom's growth to decelerate significantly after lapping its pandemic-era growth spurt. Its stock has also plunged over 80% since hitting its all-time high in October 2020, and it now looks more reasonably valued at 24 times its adjusted earnings forecast for this year. Let's see if Zoom's business is stabilizing and if its beaten-down stock is finally worth buying.

Image source: Zoom.

Triple-digit growth to single-digit growth

Zoom's revenue surged 326% to $2.65 billion in fiscal 2021, which ended in January of the calendar year. That growth was primarily driven by remote work, online learning, and stay-at-home trends throughout the pandemic.

But in fiscal 2022 its revenue only rose 55% to $4.10 billion as lockdown measures ended. On a quarterly basis, its year-over-year revenue growth quickly cooled from triple-digit to single-digit rates.

Data source: Zoom. YOY = Year over year.

Zoom expects its revenue to grow just 4%-5% year-over-year in the third quarter, compared to analysts' expectations for nearly 7% growth, and to stay nearly flat sequentially. For the full year, it expects its revenue to rise just 7%, which also misses the consensus forecast for 11% growth.

That outlook seems dim, but Zoom is still likely growing at a faster rate than other legacy video conferencing platforms. For example, Cisco Systems' (CSCO -0.52%) collaboration segment -- which houses Zoom's rival Webex -- posted a 5% revenue decline in fiscal 2022 (which ended in July).

Slowing growth in high-value customers

Zoom gained a lot of free users during the pandemic. That's a double-edged sword, because it builds its brand awareness but compresses its margins with higher cloud hosting expenses.

To actually grow its revenue, Zoom needs to convert its free users to paid plans, which remove the time limits for its meetings, allow more attendees to join in, and provide additional cloud-based storage services and collaboration tools. However, Zoom's growth in higher-value customers -- which generate more than $100,000 in trailing-12-month revenue -- has also been decelerating.

Data source: Zoom. *Generated over $100,000 in TTM revenues.

Expanding its ecosystem

To attract more paying customers, Zoom has been expanding its ecosystem with newer enterprise-facing features, including its Zoom Phone for audio-only calls, Zoom Rooms for a hybrid mix of on-site and remote attendees in conference rooms, its Zoom Contact Center for intra-office and customer service communications, and its Zoom IQ platform for managing video-based sales calls.

During the conference call, CFO Kelly Steckelberg said Zoom Phone was the "real star" of the second quarter as its "number of customers with 10,000 or more paid seats increased 112% year-over-year." She also said Zoom Contact Center and Zoom IQ had been gaining some "early traction".

Those green shoots indicate Zoom is evolving into a more diversified communications platform, but that evolution could accelerate its collision course with larger enterprise platforms like Microsoft (MSFT -2.45%) Teams and Salesforce (CRM -1.10%). Therefore, Zoom might need to make a few acquisitions to widen its moat against those formidable rivals, especially after its attempt to buy the cloud-based contact center provider Five9 (FIVN -0.60%) for $14.7 billion collapsed last September.

Stable gross margins, shrinking operating margins

Zoom's adjusted gross and operating margins also paint a mixed view of its future:

Data source: Zoom. Non-GAAP.

Its gross margins have been stabilizing as it's scaled up its cloud services and data centers, but its operating margins have been crumbling as its soaring R&D and marketing costs have consistently outpaced its slowing revenue growth. As a result, Zoom expects its adjusted earnings EPS to decline 25%-26% year over year in the third quarter and drop 27%-28% for the full year.

It's not the right time to buy Zoom

Zoom's top-line growth is still decelerating and its operating margins will remain under pressure as it expands its ecosystem to attract more enterprise customers. Therefore, Zoom's stock might look a bit cheaper than it did back in 2020, but it still can't be considered a bargain -- especially when you can buy plenty of other stable software stocks (including Microsoft) at comparable valuations.