During the pandemic, Zoom (ZM 0.05%) became a red-hot growth stock as people flocked to its video conferencing platform for remote work, online classes, and staying in touch with family and friends. As a result, its stock skyrocketed to an all-time high of $568.34 on Oct. 19, 2020.
But as the pandemic passed, Zoom's growth cooled off and more competitors crept into its backyard. Rising interest rates exacerbated that pressure by driving investors away from pricier growth stocks, and Zoom's stock tumbled all the way back to the high $80s. Zoom has clearly taken investors on a wild ride over the past two years, but could this volatile stock finally stabilize and rally again in 2023? Let's compare the main reasons to buy, hold, or sell Zoom's stock.
Image source: Zoom.
The case for buying or holding Zoom
Zoom expects its revenue to rise just 7% in fiscal 2023, which will end in Jan. 2023, decelerating from its 55% growth in fiscal 2022 and its 326% growth in fiscal 2021. That slowdown is disappointing, but Zoom is still growing at a faster clip than many other legacy collaboration software providers. Cisco's (CSCO 0.06%) collaboration division, which houses Zoom's rival Webex, experienced a 5% revenue decline in fiscal 2022 (which ended this July). Avaya (AVYA), which provides a broader suite of cloud-based communications and collaboration services, is expected to report a 12% revenue decline this year as it struggles with "operational and executional shortcomings" amplified by macroeconomic challenges.
Zoom also continues to gain large customers which generate more than $100,000 in trailing-12-month revenues. That higher-value cohort grew 37% year over year and 7% sequentially to 3,116 customers in Zoom's latest quarter, which indicates it's still pulling more companies away from its legacy competitors.
As Zoom's enterprise business expands, it's locking in those customers with newer services -- which include Zoom Phone for audio-only calls and text messages, Zoom Rooms for a hybrid mix of on-site and remote attendees, Zoom IQ for video-based sales team calls, and Zoom Contact Center for intra-office and customer service communications.
Zoom's adjusted gross margin also expanded sequentially and year over year to 78.9% last quarter, driven by the improved efficiency and scale of its public cloud services and data centers. By comparison, Avaya's adjusted gross margin contracted sequentially and year over year to 44.9% in its latest quarter.
Lastly, Zoom is still firmly profitable on a GAAP (generally accepted accounting principles) basis, and it was still sitting on $5.5 billion in cash, cash equivalents, and marketable securities last quarter. That stable profitability and liquidity could make Zoom a lot more appealing than other unprofitable growth stocks if interest rates continue to rise.
The case for selling Zoom
The bears believe Zoom could still be rendered obsolete by formidable rivals like Microsoft (MSFT 0.37%) Teams, which bundles video conferencing services into its other cloud-based collaboration tools, or Alphabet's (GOOG 0.74%) (GOOGL 0.55%) Google Meet, which is integrated into the tech giant's other cloud-based services. These tech giants can afford to rack up persistent losses on their competing platforms to gain ground against Zoom.
As that competition heats up, Zoom's operating expenses are consistently rising. Its adjusted operating margin declined sequentially and year over year to 35.8% last quarter as it ramped up its investments in its sales capacity, channel partner enablement, and marketing campaigns. It expects that pressure to reduce its adjusted earnings per share (EPS) by 27%-28% in fiscal 2023, compared to its 52% growth in fiscal 2022 and 854% growth in fiscal 2021.
With an enterprise value of $19.1 billion, Zoom is still valued at four times this year's sales. That multiple is still a bit high when we consider that Salesforce, which is expected to generate 17% sales growth this year, trades at just five times that forecast. Therefore, Zoom's stock still can't be considered a screaming bargain at these prices.
That's probably why Zoom's insiders haven't bought a single share of the stock over the past three months. They've also sold more shares than they bought over the past 12 months -- even as it lost nearly two-thirds of its value.
Which thesis makes more sense?
Zoom won't go bankrupt anytime soon, but it won't impress the bulls until its revenue growth stabilizes, its operating margins expand, and its profits grow again. Its stock could also be easily cut in half again in this volatile market before it captures the attention of value-seeking investors. Based on these facts, I believe it still makes more sense to avoid or sell Zoom's stock -- which will likely remain out of favor throughout 2023 -- than to buy or hold it today.
