While many tech stocks have experienced a revival in stock price this year, Zoom Video Communications (ZM 1.57%) has not. The stock has been remarkably boring this year and is currently hovering around a 0% return in the first half of 2023.
With so many other stocks experiencing significant gains, is it time for investors to move on from Zoom Video? Or is there something else going on here? Let's find out.
Zoom Phone isn't going to be a world-changer
Zoom Video provided the world with a vital software offering during the pandemic years. However, now that COVID-19 is largely out of the picture, companies have asked workers to return to their offices, and happy hours have returned to in-person versus over a screen.
Plus, it's likely that most companies that wanted to sign up for Zoom already have, so the market is Zoom's to lose unless it can introduce new products to keep it ahead of the competition. The company's biggest initiative is Zoom Phone, which now accounts for over 10% of Zoom's revenue.
Zoom Phone is a VoIP (voice over internet protocol) service that allows companies to make phone calls on laptops or a cellphone, much like your traditional office phone does. However, the bonus is that a company doesn't need to pay for the actual phone hardware; it does it all through an employee's personal device or company-issued computer.
This is a slow-moving growth driver, as companies might consider switching to this solution once their office phone setup is replaced. Replacing office phones doesn't occur that often, so for this to be considered a short-term catalyst would be a mistake.
So with Zoom still searching for anything that can kick-start its revenue growth, is the stock something investors should hold on to?
Zoom's one investible aspect was eliminated in Q1
As mentioned, Zoom isn't growing very fast: Its revenue rose 3% year over year in Q1 of FY 2024 (ending April 30). Furthermore, while many tech companies gained efficiency over the past year, Zoom's operating expenses skyrocketed, rising 33% in Q1.
For expenses to expand that quickly when the underlying business doesn't have any major growth drivers is a massive concern, especially since it destroyed the one thing Zoom had going for it: profitability.
Zoom's earnings per share (EPS) tumbled from $0.38 to $0.05 and will likely not have any growth to increase this figure in the near future.
ZM EPS Diluted (Quarterly) data by YCharts
The only thing Zoom has going for it right now is its gigantic cash hoard. With over $5.5 billion in cash and marketable securities and no debt on its balance sheet and growing, over 25% of its $20 billion valuation is attributable to its balance sheet.
Zoom could go out and buy a business with that cash, but it hasn't explored any options ever since Five9 shareholders shot down the Five9 acquisition. It has been nearly a year since that occurred, and with valuations only getting more expensive, management may have missed a significant opportunity to secure another growth wing.
That's too many strikes against Zoom, and the stock isn't worth holding on to anymore. Zoom shouldn't be considered a growth stock, since it hasn't increased its revenue by more than 10% in a year. It might fall into value stock territory if Zoom decreased its expenses or bought back stock, but it's doing neither.
There are many more promising stocks out there, and I'd rather deploy my investing capital to one of those companies than leave it with Zoom. While Zoom has taken shareholders on quite the roller-coaster ride, it may be time to find a new one.
