Zoom (ZM 1.46%) recently posted a sixth consecutive quarter of sales over $1 billion, but Wall Street wasn't impressed. Never mind that the video communications giant earned just $623 million in annual sales in the year before the pandemic. Zoom's stock has been battered in 2022 even though the company is on pace to reach almost $4.5 billion of revenue this fiscal year.
The stock's decline this year and following its fiscal third-quarter report could create a buying opportunity for patient investors. On the other hand, it might signal even worse returns ahead for shareholders.
Let's take a closer look at the bullish thesis in light of Zoom's mid-November earnings update.
The sales trends
Zoom's operating results through late October were impressive. Sure, sales trends are slowing compared to booming growth in earlier phases of the pandemic. But Zoom is still expanding its footprint, with sales rising 7% after accounting for currency exchange rate swings. The company's $1.1 billion Q3 revenue edged past management's late-August forecast.
Zoom's enterprise division was the biggest factor driving those gains. The customer base in this segment grew by 14% while average contract renewals also occurred at about 17% higher annual rates. The company did especially well with large clients. The volume of contracts totaling over $100,000 in annual revenue was up 31% year over year. On the downside, Zoom continued to see less interest in its consumer-focused segment, which has been shrinking since the end of widespread social distancing efforts. That unit shrank 9% even as the enterprise division grew by 20%.
Still profitable
Zoom isn't nearly as profitable as it was in the soaring growth days through most of 2020 and 2021. Yet it still generates ample profits.
Non-GAAP (adjusted) operating margin has only declined to 36% of sales through the first nine months of this fiscal year compared to 41% of sales a year ago. Zoom is also profitable on a generally accepted accounting principles (GAAP) basis, and has generated over $1 billion of operating cash flow over the last three quarters.
These wins mean the company likely won't have to launch aggressive restructuring plans or scale back sharply on its innovation initiatives. On the contrary, it is pouring resources into new offerings like mail and calendar support that are bulking up its software-as-a-service portfolio.
Why buy the stock?
The best reason to buy Zoom stock today is the expectation that this bigger portfolio will allow the business to steadily expand its sales footprint while boosting profit margins. The first part of that equation is already showing up in Zoom's results. The company isn't struggling to land new enterprise clients or to convince existing ones to sign up for more services.
Yet it isn't clear when Zoom's profitability will stabilize, let alone when it might start climbing back toward the peak levels investors saw in mid-2021. However, investors seem to be getting a good deal for the stock in exchange for that risk. You can buy Zoom today for less than six times annual sales, compared to its pre-pandemic level of over 20.
Yes, that valuation slump reflects the likelihood that growth will be much slower over the next several years. But Zoom has the resources it needs to survive an industry downturn. And its over 50% stock price decline in 2022 makes it look more attractive for growth-focused investors looking for exposure to the digital transformation space.
