Zoom Video Communications (ZM 1.57%) arguably became the ultimate lockdown stock in 2020 as businesses and consumers flocked to the platform to stay connected. But as lockdowns eased and the economy re-opened, interest in the platform eased as well, and did the elevated stock value. Now a new concern arises, as noted on its fiscal Q3 2023 earnings call (a quarter that ended on Sept. 30), as the company reports slowing demand from large enterprises related to the struggling economy.
Despite these issues old and new, continued usage of the platform indicates online meetings are now a permanent fixture of everyday life. That increases the likelihood that Zoom can still prosper in 2023 and beyond. Here are three reasons I'm still confident about this stock.
1. Zoom offers top-notch workability and accessibility
Some analysts seem to overlook the intangibles of the Zoom platform. Part of Zoom's appeal revolves around the simplicity of its software. Participants can get on a Zoom meeting with just one click. The platform also made its sound and video applications automatic and integrated other features.
Additionally, it offers much of its functionality for free, including unlimited group meetings for up to 40 minutes. This accessibility brought users into its ecosystem and made its name known to the public. Consequently, it commands the majority of the market share in the videoconferencing space.
Data source: T3 Technology Hub.
2. Zoom expands its ecosystem to keep remote workers interested
That outsized market share is notable as it must contend with competition from established players like Cisco Systems WebEx service and Microsoft Teams. Microsoft's liquidity of $107 billion far exceeds Zoom's $22 billion market cap, the cumulative value of all of its stock.
Demand keeps rising for Zoom's services as remote work becomes a part-time or full-time arrangement for a growing segment of the world's workforce. To keep the attention of this growing group of remote workers and beat back the competition, Zoom is expanding its ecosystem and offering added services.
For instance, to enhance meeting functions, Zoom integrates chat, phone, email, calendar, and a digital whiteboard to improve communications. The company also offers an analytics platform to deliver insights and a contact center that enhances communications between a business and its customers. Such an environment can integrate an enterprise's communications and, more importantly, make remote work seem more like an in-person experience.
3. Zoom's valuation is more reasonable and its financials are solid
Unfortunately for Zoom, its improved services did not stave off a brutal sell-off in Zoom stock. It now trades at an 85% discount to its high in the fall of 2020.
Moreover, growth has slowed dramatically. In the first three quarters of fiscal 2023, revenue of $3.3 billion grew by only 8% compared with the same period in 2021. One year before, yearly revenue growth for the same time frame stood at 71%.
In the first nine months of fiscal 2023, it reported $208 million in net income. That is a significant drop from $885 million in the first three quarters of 2021. Higher operating expenses and strategic investment losses weighed heavily on the bottom line.
Still, the profits stand out at a time when many growth companies contend with losses. And even with the lower earnings, the tech stock's P/E ratio stands at 33 as it bounces from its all-time low earnings multiple from the summer. Also, its price-to-sales ratio has fallen to 5, down from the 120 range in 2020. This valuation could seem cheap if it can again increase its growth rate.
Making sense of Zoom
Growth investors should consider Zoom despite its challenges. Indeed, it competes with tech's largest businesses and has to pivot more heavily toward its enterprise customers as consumer interest fades.
However, it has leveraged its easy-to-use platform into a full-fledged communications ecosystem. This can carry Zoom as remote work becomes a permanent fixture in the business world.
