Zoom Video Communications (ZM -1.82%) posted its latest earnings report on May 22. For the first quarter of fiscal 2024 (ended on April 30), the cloud-based video conferencing company's revenue grew 3% year over year to $1.11 billion and exceeded analysts' estimates by $30 million. Its adjusted net income increased 12% to $353 million, or $1.16 per share, which also cleared the consensus forecast by $0.17.

Zoom's growth rates seem stable, but its stock only rose slightly after the report and the price remains nearly 90% below its all-time high. Should investors buy this out-of-favor tech stock and expect it to bounce back over the next 12 months?

A worker joins a meeting through Zoom Rooms.

Image source: Zoom Video Communications.

When a hypergrowth stock stops growing

Zoom became a hypergrowth stock during the pandemic as people flocked to its video conferencing platform to attend online classes, work remotely, and stay in touch with their family and friends. Its catchy brand, simple interface, and freemium model also gave it an edge against older enterprise video conferencing platforms.

However, Zoom's massive growth spurt set it up for a tough post-pandemic slowdown. It also faced intense competition from other similar platforms -- including Cisco Systems' (CSCO -0.02%) Webex, Meta Platforms' Facebook Messenger, and Alphabet's Google Meet -- as the market's growth cooled off. 

Metric

FY 2020

FY 2021

FY 2022

FY 2023

Revenue Growth

88%

326%

55%

7%

Adjusted EPS Growth

483%

854%

52%

(14%)

Data source: Zoom.

Zoom's explosive pandemic-era growth rates, along with the buying frenzy in growth and meme stocks, propelled its stock to a record high of $568.34 per share on Oct. 19, 2020. But at that peak, its enterprise value swelled to $160 billion -- a whopping 39 times the $4.1 billion in revenue it would generate in fiscal 2022 (which ended on Jan. 31, 2022).

That bubbly valuation made Zoom an easy target for the bears as its growth decelerated and rising interest rates drove investors toward cheaper stocks. Zoom tried to evolve into a more diversified cloud-based communications company by buying the cloud-based contact center Five9 in 2021, but that deal eventually fell through.

In fiscal 2024, Zoom expects its revenue to only rise 2% as its adjusted EPS dips 1%-3%. It attributes that slowdown to its weakness in Europe and Asia, which is offsetting its growth in North America, as well as a strong dollar and macro headwinds in the enterprise market. However, Zoom's revenue and EPS forecasts still topped analysts' expectations.

But don't overlook its underlying strengths

Zoom's near-term growth rates seem anemic, but it's stabilizing its margins with aggressive cost-cutting measures -- including layoffs for approximately 15% of its employees earlier this year. That's why its adjusted operating margin expanded 100 basis points year over year to 38.2% in the first quarter of fiscal 2024. It expects to post an adjusted operating margin of 36.5%-36.8% for the full year, compared to its operating margin of 35.9% in fiscal 2023.

Zoom is also still gaining larger customers, which generate more than $100,000 in trailing 12-month revenue, in this tough macroeconomic environment. That higher-value cohort grew 23% year over year to 3,580 customers in the first quarter, which suggests it isn't losing ground to Webex, Messenger, Meet, and other video conferencing platforms.

For reference, Cisco's collaboration revenue -- which comes from Webex and its on-site conferencing hardware and software -- actually declined year over year over the past three quarters as Zoom continued to grow. That's ironic since Zoom's CEO Eric Yuan actually once worked at Cisco, which rejected his idea for developing a smartphone-friendly video conferencing app for the company's collaboration business more than a decade ago.

Zoom's stock looks a lot cheaper than it did during the meme and growth stock bubble. At $72, it trades at an enterprise value of $13 billion -- which is less than 3 times its estimated sales for fiscal 2024 and 17 times its forward earnings.

Where will Zoom's stock be in a year?

Zoom's downside potential might be limited right now, but a lack of meaningful catalysts should prevent it from staging a comeback over the next 12 months. Instead, I expect Zoom's stock to merely hold steady as investors focus on other tech companies that are better diversified, face less competition, and are growing faster in this tough market.