Zoom Video Communications (ZM 3.49%) isn't the growth stock it used to be. The video communications giant's sales trends are slowing to a crawl and profitability is declining following several years of impressive gains.
Wall Street punished the stock in response to these weakening operating trends. But it's possible the more than 50% sell-off in 2022 has gone too far. Let's take a look at a few reasons why Zoom might be ready to deliver strong returns for shareholders over the next several years.
1. Growing where it counts
The big headline in Zoom's most recent earnings report is that the company is losing business in its online segment. Small and medium-sized accounts are leaving the platform now that in-person meetings and get-togethers are back. That slump was the key reason why sales grew just 8% in fiscal Q2, missing management's short-term outlook.
However, Zoom is still growing in the key enterprise segment that promises to deliver most of its sales and earnings gains over the next several quarters. That division notched an 18% boost in the customer footprint, along with higher contract values. Zoom is landing renewals at 20% higher annual contract prices, in fact, helping sales expand in the critical niche.
It's important to note that this growth came even as many businesses returned to in-person work compared to hybrid or remote work environments last year. Zoom should benefit from this continued shift toward a flexible work setup, which should occur over many years.
2. A cash-rich business
Zoom has made a few big acquisitions lately and is still spending aggressively in areas like marketing as well as research and development. But the business is in no danger of entering a cash crunch.
On the contrary, there is little debt and nearly $6 billion on Zoom's books. The company is also solidly profitable. Operating income landed at $309 million in the past six months, or 14% of sales, compared to $521 million, or 26% of sales last year.
That financial cushion is valuable for a few reasons, including the fact that Zoom doesn't need to fund its growth investments through expensive debt. Management can instead make bold bets on improvements to the service platform, acquisitions, or stock buybacks without engaging in the type of restructuring that threatens to hurt growth.
3. The stock is cheaper
One of the best reasons to like the stock is how cheap it has become. Its price-to-sales ratio is below 6 today compared to nearly 13 at the start of the year. For context, Microsoft is valued at about 11 times revenue.
Sure, some of that valuation drop simply reflects the fact that sales gains are slowing to below 10% now and that profitability is also headed lower. But Zoom is being valued today as if it made no progress through the pandemic even after jumping to nearly $5 billion in annual sales from below $1 billion in 2019.
If you think there's a good chance that Zoom will continue improving its communication platform over time so that more enterprises expand their contracts, then the stock looks like an attractive way to gain exposure to the digital transformation trend. Zoom led that stampede in the early days of the pandemic, and it will likely recover that swagger once the dust settles on the current growth hangover.
