Zoom Video Communications (ZM 1.06%) stock has been in a freefall. Shares of the video conferencing giant have plunged 75% over the past year. Investors fled this pandemic darling as more people returned to the office and started meeting in person again.

This week, the stock took another hit after Zoom reported disappointing second-quarter results and cut its full-year forecast. However, while Zoom has hit some growth headwinds, it's generating a lot of cash. It produced $222.1 million of adjusted free cash flow in the second quarter. That free cash flow gives the company a huge advantage. 

Zooming in for a closer look at the financial statements

A first glance, Zoom's financial results were a bit underwhelming. While it does stand out among growth tech stocks because it's profitable and generates free cash flow, both numbers fell sharply in the second quarter. Even though revenue rose 8% to nearly $1.1 billion, GAAP net income tumbled from $316.9 million, or $1.04 per share, in last year's second quarter to $45.7 million, or $0.15 per share. Meanwhile, adjusted free cash flow plunged more than 50% to $222.1 million. 

However, that's entirely due to the company's strategic decision to ramp spending on research and development (R&D) and sales and marketing to drive future growth. R&D spending has more than doubled in the first six months of the year, while sales and marketing spending is up almost 50%.

The company's R&D investments and increased sales and marketing spending to expand beyond its video conferencing platform are already delivering results. Zoom sold a record number of Zoom Phone licenses in the quarter and now has 4 million seats, up 100% over the past year. Meanwhile, it recently launched Zoom Contact Center and Zoom IQ for Sales, which are starting to win over customers. CFO Kelly Steckelberg noted on the quarterly conference call that while Zoom Contact Center is only six months old, it has already reached deal sizes that it didn't expect until its second year.

The cash to continue growing

Even with that increased spending, Zoom continues to generate a lot of cash. That enables the company to make strategic investments while maintaining a pristine balance sheet.

The company has invested over $238 million this year to purchase property and equipment, make strategic investments and acquisitions, and purchase intangible assets. One notable investment was its acquisition of Solvvy to help drive its contact center expansion. Solvvy offers advanced conversational AI and automation capabilities to help Zoom deliver better customer service experiences. 

Meanwhile, it still has a lot of money to work with after ending July with $5.5 billion in cash against zero debt. That's roughly $100 million more than it had at the end of January. 

That enormous cash balance and Zoom's ability to generate free cash give it a huge competitive advantage these days. With interest rates rising and stock prices falling, it's getting much more challenging for companies to access capital, especially if they're not profitable and have debt. That's limiting their ability to continue investing. 

However, since Zoom doesn't need to access outside capital, it has the financial flexibility to continue investing during the current economic uncertainty. While CFO Kelly Steckelberg did caution on the second-quarter call that Zoom's "taking a prudent and cautious approach in this environment" it has the financial means for "focused investments and hiring to drive innovation and customer happiness." It also has the financial resources to make acquisitions if the right opportunity emerges.

Those investments should pay off over the long run. Hybrid work is here to stay, and Zoom remains committed to building a platform to help companies stay connected to their teams while expanding its product offerings to improve collaboration and outcomes.

Zoom's continued ability to produce cash is a huge advantage

Zoom is facing a lot of growth headwinds these days as its pandemic-driven tailwind fades, and the economy slows. However, its business is generating free cash, giving it the funds to invest in new sources of growth. That's a huge advantage these days, and investors shouldn't count Zoom out.