Zoom Video Communications (ZM 0.31%) was one of the hottest stocks during the early stages of the pandemic as its videoconferencing software made remote work and social distancing a whole lot easier. Now, however, amid a return to normal in the economy, the stock has struggled badly. It is down 76% over the past year (the S&P 500 has fallen by just 11% over that stretch), and it has given back all of its gains, once again trading at where it was in early 2020.

It might be tempting to buy the stock near its 52-week low, but investors should consider a serious risk before doing so.

The company lacks a moat

A moat is a defensible competitive advantage that allows a business to perform well and keep its investors from taking away too much market share. Zoom is a great example of a business without much moat.

While Zoom's sales were soaring over the past couple of years, it didn't make sense to me that so many businesses were buying its services when they likely already had videoconferencing capabilities of their own. Videoconferencing is not a new phenomenon by any stretch, but Zoom did make it popular and easier to use -- people just have to click a link to join a virtual meeting.

However, those aren't advantages that can hold up for long at all. Many tech companies have since enhanced their videoconferencing capabilities. For example, Microsoft's (MSFT -0.18%) Team software makes collaboration and group chat easy and now enables quick videoconferencing as well. In Windows 10, which more than 1 billion devices use every month, the company even added a Meet Now button so people can easily access the company's Skype videoconferencing capabilities.

With a huge install base from its operating system to tap into, Microsoft has a big advantage over Zoom: Microsoft Teams is already included within the Microsoft 365 suite, which gives users access to popular office apps such as Word, Excel, and PowerPoint.

Other companies also offer videoconferencing software, and preference and cost might determine which brand consumers and businesses choose. That could result in some intense competition for Zoom at a time when it's already struggling to generate growth.

Zoom's financials could take a hit

On Aug. 22, Zoom released its second quarter numbers, which weren't all that impressive. Sales of just under $1.1 billion for the period ending July 31 rose by a relatively modest rate of 8% year over year. That's a sharp decline from how fast the business has been growing in the past:

ZM Revenue (Quarterly YoY Growth) Chart

ZM Revenue (Quarterly YoY Growth) data by YCharts.

For the third quarter, the company is expecting that its revenue will remain flat, showing no growth from where it finished Q2. Over the longer term, as businesses look to trim costs amid rising inflation, paring away a videoconferencing service that runs hundreds of dollars per user per year could be an easy way to cut costs, resulting in weaker numbers for Zoom later on.

Zoom has a little wiggle room because right now, its gross margins are healthy at around 75% of revenue, so it could drop its fees a bit. But slashing prices too aggressively could send earnings into the red, because the operating margin isn't as strong as it once was:

ZM Operating Margin (Quarterly) Chart

ZM Operating Margin (Quarterly) data by YCharts.

Is Zoom's stock too expensive?

Shares of Zoom are trading near their 52-week lows. At a forward price-to-earnings (P/E) multiple of 22, the stock is trading in line with the average stock in the Technology Select Sector SPDR Fund.

But given the challenges the company is facing and the tighter margins it might post as it tries to attract new customers, its profits could deteriorate. For that reason, I'd argue that Zoom belongs at a lower future earnings multiple and isn't necessarily a steal of a deal despite being at a much lower valuation than it was a year ago.

It's a challenging time for Zoom, because the company has to prove it can generate strong enough growth numbers to justify its premium. I'm not confident it can do that without making significant price concessions. And that's why for now, I'd avoid this growth stock, since its shares could continue to fall even lower.