Zoom Video Communications (ZM 0.05%) stock investors have endured painful price swings lately. In the past three years, returns shot up above 300% during earlier phases of the pandemic before crashing back down. The communications platform stock is now down about 40% since March 2020.
The core reason for that slump is that Zoom isn't likely to grow much over the short term. Management said in a late February earnings update that sales might rise just about 2% in fiscal 2024. Smart investors know that there's much more to the bullish investment thesis, though. Let's take a closer look at three things about Zoom that smart investors are paying attention to.
1. Zoom is more than video calls
Zoom became a household name during lockdown phases of the pandemic as most work and social interactions moved online. It is that portion of the business that's seeing the worst growth hangover today. Its online division shrank by 10% in the fourth quarter and declined by 8% for the full 2023 fiscal year that ran through late January.
Yet Zoom isn't staking its future on consumers. Rather, its future growth is more likely to come from enterprises. Sales to medium and large businesses were up 24% this past fiscal year. In Q4, that division accounted for 57% of all sales compared to 50% a year ago. Zoom's success over the next several years will depend on how well the company can cater to these clients, which helps explain why the company is focused on building out a complete platform of work collaboration services.
2. Zoom is profitable
Unlike many software-as-a-service stocks, Zoom is profitable even at this early phase in its growth plan. Yet operating income in 2023 fell to $245 million compared to over $1 billion in the prior year.
ZM Operating Margin (TTM) data by YCharts
That decline gave shareholders some concerns, but there's no need to worry about Zoom's cash position. The company is sitting on over $5 billion of cash today. Free cash flow was an impressive 27% of sales last year, too. Finally, Zoom is projecting free cash flow of around $1.2 billion in fiscal 2024 on roughly $4.4 billion of sales. Those figures would translate into another year of nearly 30% free cash flow margin.
3. Zoom's outlook (short and long) is encouraging
Zoom's fiscal 2024 outlook projects sales growth of just about 2% after accounting for currency exchange rate swings. That one metric best explains why the stock has dropped over 30% in the past year compared to a 4% decline in the S&P 500. Wall Street is worried that Zoom's best days are behind it.
Yet there are encouraging signs about both the short-term and long-term outlooks. Zoom said it saw a hopeful uptick in contract durations and signups in the most recent quarter, suggesting positive momentum into early 2024. And the company's wider service platform gives it valuable competitive assets to use when compared to work collaboration rivals such as Microsoft.
The stock isn't likely to start outperforming the market until there's more clarity around the timing of Zoom's return to strong sales growth. But in the meantime, this business is likely to generate impressive profits in fiscal 2024 as management fills out the service platform in preparation for the eventual demand rebound in enterprise tech spending.
