Two years ago, a lot of people were using Zoom Video (ZM 0.58%) daily. Now, many people aren't using the product as frequently, but it is still heavily used in the business world.
However, the hype about Zoom's stock has completely dissipated. The stock that briefly traded above $560 per share now sits 87% lower at roughly $70. In fact, the stock is only up 13% since its initial public offering (IPO) in 2019 despite its world-changing (some could even argue saving) product. So is the stock severely undervalued? Or is it right where it should be? Let's see if 2023 could be the year of the Zoom Video comeback story.
Little revenue growth and rapidly rising expenses
Nearly everyone has used Zoom's free product at this point, but it also has other offerings like Zoom Phone (a voice of internet protocol (VoIP) system), Zoom Whiteboard, and a team chat product. This offering, known as Zoom One, is "everything you need to work together, all in one place," according to Zoom.
Getting customers attached to this product is the next phase of Zoom's business. In its third quarter of the fiscal year 2023 (ending Oct. 31), Zoom increased its enterprise customer count by 14% to 209,300. The number of customers spending more than $100,000 annually with Zoom also increased by 31% to 3,286.
However, none of this growth in its large customer base did much to increase its revenue. Zoom's revenue grew by a disappointing 5% year over year (YOY). Despite that minuscule revenue growth, Zoom management felt it was prudent to spend like it was going out of style on its operating expenses.
| Operating Expense | YOY Increase |
|---|---|
| Research and Development | 99% |
| Sales and Marketing | 46% |
| General and Administrative | 46% |
| Total Operating Expenses | 56% |
Source: Zoom Video.
Somehow, Zoom remained profitable in Q3, posting a $48 million profit (a 4% margin), down from last year's $340 million profit (a 32% margin).
However, if it continues down this path, it won't stay profitable for long. But is management taking steps to turn it around in 2023? Wall Street analysts say, "No."
2023 isn't looking any better for Zoom Video
For Zoom Video's 2024 fiscal year (ending Jan. 31, 2024), analysts expect revenue growth of 5.4% but earnings per share (EPS) to fall from $1.36 this fiscal year to $0.91. So, would you be interested if I approached you with a stock with very slow revenue growth and falling earnings? Probably not.
Additionally, the stock isn't very cheap on a price-to-earnings (P/E) basis.
ZM PS Ratio data by YCharts.
While the price-to-sales (P/S) ratio is low for a software company stock, few software companies are growing at this slow pace, so there aren't a lot of great comparisons.
Things are looking pretty dire for Zoom Video. About the only thing it has going for it is that it is decreasing its share count through stock repurchases. In Q3, it repurchased $565 million in shares versus the $305 million it paid to its employees. That net buyback resulted in a 0.6% decrease in outstanding shares.
However, I don't want growth-oriented companies spending money on repurchases; I want to see them spend it on capturing market share. But when the company's operating expenses increased as they did with no tangible effect, I don't have confidence in the business.
Zoom Video has some problems, and I think investors should probably stay away from the company in 2023 unless it starts growing at a respectable pace.
