Shares of video streaming collaboration platform Zoom Video Communications (ZM 1.46%) have cratered over the last few years. The stock is down 41% over the last 12 months and nearly 80% over the past two years. The problem for the company initially was the return to increased levels of in-person collaboration across much of its customer base. But now Zoom's problem is two-fold: Even as Zoom is still adjusting its operations to a post-pandemic world, it's now also dealing with the impact of an uncertain global economy on some of its customers.
This double whammy is rearing its head in the form of a massive layoff announced this week at the company. Zoom is letting go of 15% of its workforce.
Here's what this means for Zoom's business -- and why investors may want to take this as a warning sign and not a green flag to invest.
Understanding Zoom's workforce reduction
In a blog post on its website on Tuesday, Zoom CEO Eric Yuan said the company is notifying about 1,300 employees today to tell them that they are being let go as part of a "necessary decision" to reduce its workforce by 15%.
The move comes as revenue growth has come down from astronomical levels seen during 2020 and 2021 to just 5% growth in the company's most recent quarter. This growth rate was down from 35% growth in the year-ago quarter and 367% growth in the same quarter two years ago. This slowing revenue growth, of course, has been largely due to more in-person work. But the uncertain macroeconomic environment is weighing on the company now as well.
"[T]he uncertainty of the global economy, and its effect on our customers, means we need to take a hard -- yet important -- look inward to reset ourselves so we can weather the economic environment, deliver for our customers and achieve Zoom's long-term vision," explained Zoom CEO Eric Yuan the company's press release about its layoff.
Taking accountability for the move, Yuan said he is reducing his salary by 98% in the coming year and is foregoing his fiscal 2023 corporate bonus.
The transitioning employees will be provided benefits, including 16 weeks' salary and healthcare coverage, a fiscal 2023 annual bonus based on company performance, and more.
Stay on the sidelines (for now)
While it's good to see Zoom being cautious with its expenses (a move that could bolster profits), it also suggests that management isn't confident in returning to meaningfully higher growth rates anytime soon. With this in mind, it may be wise for investors to stay on the sidelines for now. Investors should look for the company to demonstrate a return to more robust growth rates in order to justify the stock's current valuation. The company's market capitalization of about $25 billion today prices in sustained levels of high growth rates for years to come.
