Zoom Video Communications' (ZM +2.32%) stock has been out of favor in this post-pandemic economy. The combination punches of demand falling off a cliff as the economy reopened, intensifying competition, and inflation (and with it, rising interest rates) hit the company hard, reducing investors' appetite for the stock.
The company is sitting only 9% above its 52-week low of $63.55, which it had dropped to on Dec. 27, 2022, and shareholders are thoroughly demoralized from the stock's precipitous drop over the last three years. So should you invest in the stock with so much pessimism surrounding Zoom?
NASDAQ: ZM
Key Data Points
The post-pandemic period has not been kind
With the stock zooming approximately 831% to an all-time high of $568.34 on Oct. 19, 2020, Zoom was one of the biggest market darlings during the pandemic. However, the stock turned into a pumpkin after the market first saw the extent of the company's severe loss of demand.
Its year-over-year revenue growth collapsed from 369% in the fourth quarter of fiscal year 2021 (the calendar year 2020) to 54% revenue growth in the second quarter of the fiscal year 2022. As you can see in the following chart, the stock price collapsed soon after.
ZM revenue (quarterly YoY growth) data by YCharts. YoY = year over year.
The company recently reported a fourth-quarter fiscal 2023 year-over-year revenue increase of only 4%, showing growth has almost reached a standstill. And after first achieving earnings-per-share (EPS) profitability in mid-2020, it recorded an EPS loss of $0.36 per share in the fourth quarter of fiscal 2023, compared to the $1.60 EPS it made in the previous year's comparable quarter.
ZM EPS diluted (TTM) data by YCharts. TTM = trailing 12 months.
In early February, the company announced laying off 1,300 employees, approximately 15% of its workforce, in a cost-cutting move to help reestablish profitability. In addition, in a symbolic action, chief executive officer Eric Yuan reduced his fiscal 2024 salary by 98% and will refuse his fiscal year 2023 corporate bonus.
What makes Zoom attractive?
Zoom still generates significant positive free cash flow (FCF) post-pandemic, producing $1.2 billion trailing-12-month FCF as of January 2023. It also has $5.41 billion in cash with no long-term debt on the balance sheet -- so it's in little danger of financial distress. This is a company likely to survive this downturn.
ZM cash and short-term investments (quarterly) data by YCharts.
Zoom has several products on the market that could be game-changing and reaccelerate revenue in the calendar year 2024 or 2025. These products include Zoom Phone, Zoom One, and Contact Center.
Zoom Contact Center is a help-desk technology designed for video and incorporated into the Zoom platform. It was introduced in February 2022 and is already seeing strong adoption from a small base.
It reported that annual recurring revenue (ARR) for Contact Center was up 100% sequentially in the fourth quarter. In addition, Contact Center landed a big fish in the fourth quarter, a 2,000-seat contact-center deal, its largest ever. This progress gives management confidence that Contact Center revenue will accelerate in the 2024 calendar year.
Zoom One lets users pick one of six variations of product bundles: Basic, Pro, Business, Business Plus, Enterprise, and Enterprise Plus. Each variation contains different combinations of a phone, whiteboard, chat, meetings, and other collaboration products combined into a single solution.
According to Yuan, Zoom One has been so successful since its launch in June 2022 that it pulled up the performance of an essential part of the bundle, Zoom Phone, which grew 100% over the previous year's comparable quarter and exceeded 5.5 million seats in the fourth quarter. Yuan claims this made it a leader in the cloud-based phone market.
It has a trailing-12-month dollar-based net expansion rate (DBNER) for enterprise customers of 115%, meaning its existing customers are still increasing their spending on Zoom's bundles and add-on products despite the enterprise market slowing due to a poor economy.
The higher the DBNER is above 100%, the more products that existing customers have purchased and the more invested they have become in the platform, raising the cost for those customers to switch to a competitor. Furthermore, the higher the DBNER, the more a company has pricing power and the potential to raise its profitability margins.
One reason bullish investors can maintain optimism is that Zoom proved it can produce higher DBNER in a healthier economy. For instance, in the fourth-quarter 2021 earnings release, management said it had maintained a DBNER of above 130% for 11 consecutive quarters.
Moreover, since DBNER is an excellent measure of the traction its products have among its enterprise customers, should you see this metric rising above 115% in future earnings reports, it bodes well for revenue growth.
Should you buy Zoom stock at its current price?
The market values the stock at a price-to-sales (P/S) ratio of 4.8, just above its all-time P/S low of 4.63. Considering the growth potential of its newer products, the market is undervaluing this stock, which has terrific long-term upside.
Suppose you buy this stock at current prices; you must be patient because Zoom's new products will take time to move the needle and reaccelerate revenue growth. The company will also need cooperation from an improving economy for the stock price to turn around.
