Zoom (ZM 1.57%) stock is far below the highs it set back during the pandemic when people across the world were depending on its video communication platform to replace in-person meetings. Shares are underperforming in 2023, as well, sitting out the rally that has pushed many other tech stocks higher this year.
There are some good reasons for investors to be cautious about Zoom, after all, since its growth prospects aren't as bright as they had been a few years ago. Still, the business is profitable and could see accelerating sales gains over the next few years in its enterprise division. With those big-picture factors in mind let's look at whether the stock is a buy right now.
Raising the bar
Yes, Zoom's latest growth results have been lackluster. Sales only rose 5% in the Q1 selling period that ran through late April. Yet look closer and you'll see a big difference between its two main business lines. The online segment, which is made up of the type of accounts that boomed during the pandemic, declined 8% this past quarter. The good news is that this business is finally stabilizing after over a year of big declines.
Meanwhile, the enterprise segment is expanding at a solid clip, rising 13% to $632 million. And these customers increasingly decided to boost their annual commitments when it came time to renew the contracts. Successes here convinced management to take a brighter view of the broader business. "The solid start to the year has enabled us to raise our outlook for fiscal year 2024," CEO Eric Yuan said in late May .
Good finances
Zoom is also in a great financial position. The company was sitting on nearly $6 billion of cash as of late April. It generated $400 million of free cash flow this past quarter, too, thanks to its efficient software-as-a-service selling model. And net income has remained positive despite slowing sales growth and Zoom's increased spending on growth initiatives. These initiatives include incorporating AI into its communication services and making bolt-on acquisitions to fill out its platform.
ZM Cash from Operations (TTM) data by YCharts
Zoom is now targeting sales of about $4.5 billion this year, with non-GAAP operating income on pace to reach $1.6 billion. For context, Zoom generated roughly the same adjusted profits in each of the last two fiscal years.
The stock price
Investors don't have to pay a huge premium to own this stock right now. Zoom is valued at less than 5 times annual sales while other software specialists like Microsoft and Palo Alto Networks are valued at closer to 12 times sales. Sure, Zoom isn't growing as quickly as these companies, and it faces some big challenges in crafting a defensible market share position in the enterprise communications niche.
But investors might consider buying this relatively cheap stock. Zoom's strong finances give it flexibility to build on its growth momentum over the next several quarters. Rising enterprise spending could accelerate further, too, given the high engagement metrics Zoom is seeing today. Overall, Zoom stock looks attractive as it eyes a potential growth rebound in fiscal 2024 and beyond.
