Zoom (ZM -0.82%) stock has fallen out of Wall Street's good graces in 2022. Many investors are worried that the digital communications specialist's best days are behind it now that the world is settling back into more normal work patterns as the need for social distancing appears to have receded.
That assessment helps explain why Zoom's stock is trailing a down market by such a wide margin this year. But it doesn't capture the whole story for this promising company, which is capturing a large share of business in the ongoing shift toward flexible work.
A few factors make Zoom stand out to me as an attractive investment.
1. It is still growing
Zoom is being valued today as if the pandemic hasn't fundamentally changed its business -- which it has. Sure, the company is guiding for revenue of around $4.4 billion in its current fiscal year (FY 2023), which ends Jan. 31, which would be only modest growth compared to fiscal 2022's $4.1 billion. But it's a huge increase compared to Zoom's fiscal 2021 figure of $623 million.
This year's sales gains are coming mainly coming from enterprise clients, which continue to flock to its communications services even as people are returning to the office and resuming in-person meetings. While management would prefer to see stronger demand for its consumer-based subscriptions, the company's enterprise segment has a long runway for growth. "Businesses are drawn to the Zoom platform because of our innovation and modern architecture," CEO Eric Yuan said in late August.
2. Finances are strong
Unlike other pandemic growth stocks, finances haven't become a major weakness for Zoom as the COVID-19 threat has waned. Its profitability has declined, but is still strong. Zoom generated $309 million of operating profit in the first half of fiscal 2023, or 14% of sales, compared to $521 million, or 26% of sales, a year ago.
ZM Operating Margin (TTM) data by YCharts
The company remains profitable on a generally accepted accounting principles (GAAP)b basis, too, and has no need to tap into debt markets thanks to its solid cash flow trends. Its adjusted profit margin is on pace to fall to 33% this year from 40% in fiscal 2022 -- a modest pullback from a period when social distancing efforts were still fairly intense.
3. The portfolio is widening
The investment thesis for Zoom rests on the premise that it will be able to use its new market strength to sell a wider range of services to businesses. That's why the company has been pouring money into research and development, and releasing new products such as its digital phone platform. Zoom also spent aggressively to acquire an AI-based chat system.
Its successes on this score have persuaded many of its clients to dramatically boost their annual spending with the company. Management highlighted a few of these customers in Zoom's most recent conference call with investors in August.
Zoom needs more wins to extend its relevance past the crisis environment during which necessity turned it into a household name. But it has the cash and the customer base it needs to engineer such a move.
Now it will be up to Zoom to capitalize on those assets through new product development and marketing so that it grows beyond $5 billion in annual sales in the next few years.
