Zoom Video Communications (ZM -2.25%) is a pandemic-era icon. Millions of people have turned to it to connect with each other. And it is a far stronger business as a result. Annual sales are comfortably above $4 billion today compared to less than $1 billion pre-pandemic, and its video communication platform has become an essential service for many large and small enterprises.
But you wouldn't know it from its slumping stock price -- down 60% year to date. Investors are worried that this phenomenal growth story is over, and that Zoom's next few years will be marked by weakening earnings and stagnant sales. With that big picture in mind, let's look at Zoom's prospects over the next five years.
Starting from strength
The good news is that Zoom is entering a potentially rough short-term period from a position of strength. Sure, sales trends are slowing, and revenue rose by just 8% in the most recent quarter. But Zoom isn't alone in showing weaker growth.
Industry peers like Microsoft have noted declining demand for productivity and communications software after soaring results through most of the pandemic. Even Best Buy has complained about slumping consumer demand in this area.
That's why Zoom is leaning harder into the enterprise niche, targeting large companies. The outlook is weak for those smaller and medium-size businesses that needed Zoom during the lockdown phases of the pandemic.
But most big businesses will need the flexibility to allow for hybrid or remote work well into the future. Management highlighted "continued momentum" in that market this past quarter, which powered Zoom to its fifth consecutive quarter of over $1 billion in sales .
Flexible finances
Many companies went overboard in their spending just before demand trends decelerated, causing painful earnings declines. Zoom isn't in this category.
It has remained solidly profitable and cash rich through the first half of its fiscal 2023, which ended in late July. Management also predicts that Zoom will generate nearly $1.5 billion in operating earnings this year despite worsening sales trends. The company holds little debt, too.
All these factors mean Zoom can be aggressive in attacking new growth initiatives, like acquisitions or the expansion of its communications platform into new niches. Management can also temporarily scale back on those ambitions in the next year or so if a recession develops, without needing a costly restructuring of its business.
The path forward
In any case, Zoom's biggest targets -- business productivity and communication -- are likely to be much larger in 2027 than they are today. The company has put itself in a leadership position, too, along with the likes of Microsoft. And Zoom shares some of the software titan's financial strength, but not its diversity of product offerings.
That's why the biggest factor driving returns over the next few years will be Zoom's ability to widen its reach beyond video communications. The company is already making progress with its popular phone and chat services. But it will need many more wins in these areas if it can reasonably target a much bigger annual sales footprint than its current $4 billion level.
There's no telling whether Zoom will succeed with this strategy. But its solid finances and premium market position are valuable assets in the fight, implying that the company will be larger in a few years than it is today. Investors who can stomach the likely continued volatility over the short term might look back and be glad they held on to this stock.
