What happened
Shares of Zoom Video Communications (ZM 3.26%) plunged by 63.2% in 2022, according to data provided by S&P Global Market Intelligence.
The fall was in line with the sharp decline in valuations across a variety of pandemic-boosted growth stocks as interest rates surged and inflation hit a four-decade high.
Image source: Getty Images.
So what
Zoom was a beneficiary of the pandemic-induced surge in online activity as individuals and corporations scrambled to adopt videoconferencing in the wake of movement restrictions. Last year, the effects of this surge had begun to wane, leading to the company reporting a sharp slowdown in top-line growth. For the first nine months of fiscal 2023 (the period ended Oct. 31, 2022), revenue increased just 8.1% year over year to $3.3 billion, a significant fall from the prior year's 71.2% year-over-year jump. Net income also plunged by 76.5% year over year to $207.7 million, as opposed to more than doubling to $884.6 million in the previous year.
To make matters worse, Zoom had forecast revenue of around $1.1 billion for its fourth quarter, up just 2.7% year over year. The steady decline in year-over-year revenue increases had investors worried as to whether the videoconferencing platform may witness a decline in revenue soon. Given the company's higher spending on research and development, net income could come under further pressure.
Now what
These fears only focus on the negative aspects of Zoom's numbers but fail to account for the positive ones. For one, the company continues to churn out healthy levels of free cash flow. The first nine months of 2023 saw free cash flow of $992.5 million, just 22.1% lower than the prior year's $1.27 billion.
Zoom is also positioning itself well for the future. At its recent Zoomtopia Investor Day event, the company unveiled a slew of innovations that promise to improve employee engagement and offer benefits for developers. The new beta version of Zoom Email and Calendar will also be integrated into its platform. Zoom has also increased the number of large accounts it maintains over the past three years, putting it on a firmer footing compared to its pre-pandemic days. Customers with more than $100,000 in annual recurring revenue (ARR) jumped from 710 in the second quarter of fiscal 2020 to 3,865 in the second quarter of fiscal 2023. For accounts with ARR greater than $1 million, the surge was even larger, going from 23 to 223 within the same period.
The company has also dropped a not-so-subtle reminder on how persistent trends in hybrid work and the use of videoconferencing tools can expand its total addressable market from just $34 billion in 2019 to an estimated $125 billion by 2026. That's a lot more growth for Zoom to capture and the company may just be getting started.
