In the constant Wall Street battle between pessimists and optimists, the bears have the upper hand on Zoom Video Communications (ZM 1.57%) stock today. The software company's shares have dropped over 70% since 2021, when its platform was the No. 1 choice for millions of people conducting meetings during pandemic-fueled social restrictions. The stock is underperforming through the market rally this year as well.
Yet Zoom's business is still setting sales records even if growth is occurring at a much slower pace these days. And its financial position is strong with the bottom line and cash flow both positive through mid-2023. Let's take a look at whether those encouraging factors puncture a hole in the bearish thesis for this formerly high-flying growth stock.
The bearish outlook
Zoom is targeting nearly $5 billion of annual sales this year, which is many multiples of its pre-pandemic total of $700 million. Bears believe those high-growth days are long gone, given that revenue will barely rise in 2023. Most Wall Street pros are projecting just 4% gains next year, too.
Those are paltry figures, considering larger companies like Microsoft (MSFT 1.82%) are growing at double-digit rates right now. And Microsoft is one of several deep-pocketed rivals aiming to win market share in the video communications niche. It's hard to see how Zoom stock could deliver adequate returns for investors without generating sustainably strong sales growth in the competitive cloud services space.
The bullish thesis
Look closer, though, and you'll see some compelling bright spots in Zoom's latest results. Its enterprise segment is expanding at a 10% rate right now, for example, and is attracting more large clients each quarter.
Management believes this segment will be a huge source of momentum going forward through the combination of an increasing customer base and higher average spending. Both factors are already lifting sales today. Incorporating artificial intelligence (AI) throughout the platform should also enhance productivity and allow for higher contract sizes over time.
ZM Cash from Operations (TTM) data by YCharts
Meanwhile, Zoom is in excellent financial shape. Operating cash flow was up 31% last quarter, operating profitability sat at 16% of sales, and Zoom held $6 billion of cash as of late July. These resources, plus its established brand, give the company valuable flexibility to attack different growth avenues over the coming years.
Watch and see
Investors might want to watch the stock for now, at least until more concrete evidence emerges that supports this bullish reading. Zoom currently lacks the type of demand and profitability trends that get growth stock investors excited, after all.
If you don't mind elevated risk, though, you might consider starting a small position in the stock. Zoom's reduced valuation reflects much of the bearish negativity outlined above, but Wall Street isn't giving the company credit for locking in its pandemic gains while maintaining positive cash flow and earnings.
That situation could set up a nice rebound for the stock if Zoom is able to continue growing its influence among enterprises seeking a comprehensive digital communications platform.
