Wall Street doesn't seem to know what to make of Zoom Video Communications (ZM 1.57%) as a business today. The communications services specialist's stock has at times outperformed the S&P 500 in 2023 but has mainly trailed the index. Shares are up less than 10% through late July, compared with the wider market's 19% surge.
Bulls will argue that it's only a matter of time before the software developer returns to its prior market-thumping path as growth rates accelerate and annual earnings begin expanding. Bears see more room for the stock's valuation to contract, on the other hand, as competition heats up from deep-pocketed companies like Microsoft.
Which version of the outlook is closer to the truth? Let's dive right in.
Bearish outlook: The growth days are over
Bears believe Zoom's best growth days are behind the company. It has been more than a year, after all, since the company's pandemic demand spike pushed revenue higher by over 300% in 2020 and through part of 2021.
Sales in the most recent quarter were up only 3%, in contrast, to $1.1 billion. The videoconferencing service that became a household name during the pandemic has been shedding customers for several quarters an only just started showing signs of stabilizing in early 2023.
Zoom is barely profitable, too. Net income this past quarter landed at just $15 million, or roughly 1% of revenue. The prospects aren't bright for this metric to rebound sharply in the short term, either as management spends heavily in areas like R&D, data infrastructure, and adding more AI features into the platform. "Innovation will remain a top priority for Zoom," executives said in a mid-May conference call. Slow sales gains plus weak earnings prospects hardly make an attractive growth stock, bears will argue.
Bullish outlook: Enterprises are happy
Focus more on Zoom's enterprise division, and the picture brightens considerably. That segment expanded at a 13% last quarter thanks to the combination of a growing base of customers and higher spending. On average, most contracts were renewed at 12% higher than the previous year's rate. Zoom is also winning more large enterprises, with contracts totaling over $100,000 in annual commitments rising 23% in Q1.
Zoom is also generating plenty of cash today, as operating cash flow passed $400 million. The company is not likely to need debt anytime soon, either, as it holds nearly $6 billion of cash on its books.
Yet the main bullish argument is that Zoom should find success at steadily raising the value of its service platform so that it attracts more customers at higher annual rates.
The relatively new Zoom phone business has already grown to surpass 10% of revenue, for example, and there are dozens of similar innovations working their way into its software now. Artificial intelligence is being tested in its chat and email support features, for example, and clients are enjoying the whiteboard functionality.
The better read
On balance, the bullish outlook prevails here. Sure, Zoom isn't likely to see anything like its pandemic-era growth rates again. But the business has an excellent market share position in a niche that's likely to expand for many years.
Its profitable posture and positive cash flow make it less risky than some software-as-a-service peers as well. And the stock is valued at just 5 times annual sales, compared with Microsoft's ratio of 12. That gap lays the groundwork for potentially market-thumping returns for patient shareholders from here.
