Zoom Video Communications (ZM 1.57%) enjoyed phenomenal growth during the pandemic, but the past year has been much less exciting for shareholders. Profits are down in the first half of its latest fiscal year (ended July 31), sales gains have slowed, and the company continues to lose customers in its core online meetings business.
On the bright side, Zoom has done a good job holding on to most of the gains it achieved during those high-growth days when its service was essential for people practicing social distancing during the COVID-19 lockdowns. Management sees lots of opportunity in its pivot toward enterprise services as well.
Against that mixed backdrop, let's look at Zoom's prospects in 2023 and beyond.
The path forward
According to management's late August update, Zoom is on track to generate roughly $4.5 billion of revenue this year compared to $4.4 billion in fiscal 2023 (which ended Jan. 31). Achieving this result would mark a second consecutive year of slowing growth as revenue rises by a lackluster 2% following last year's 7% increase.
The big question going forward is whether Zoom can speed its growth back up from here. Fortunately, it is finding success in its enterprise division, where sales rose 10% in the most recent quarter. That boost was partly thanks to an expanding client list, especially among larger customers. Zoom has also convinced many existing customers to renew contracts at higher annual values.
Wins here can keep overall revenue rising in the next year, but sluggish corporate IT spending trends could limit those gains. Most Wall Street pros are expecting another sub-5% sales increase in fiscal 2025.
Staying profitable
The news is more clearly positive around Zoom's finances. While profit margins are down, the software specialist has maintained positive net earnings despite the sharp growth slowdown. Operating profit margin landed at 8% of sales in the first half of fiscal 2024 compared to 14% a year earlier.
ZM Operating Margin (TTM) data by YCharts
Cash flow, a key metric for any software-as-a-service business, is rebounding from last year's lows. Zoom is also sitting on over $6 billion of cash right now, which gives executives lots of flexibility as they target growth initiatives like acquisitions and the integration of more artificial intelligence (AI) into the platform.
Looking ahead
Steadily boosting the value of that communications platform is the surest path toward positive returns for Zoom's business and its shareholders over the next year. These innovations, particularly if combined with a rebound in the IT spending environment, could allow the company to meaningfully outpace the sluggish growth that investors are expecting from it in fiscal 2024 and 2025.
There's also the potential for a game-changing acquisition that boosts Zoom's addressable market. Yet the most likely scenario is that the company will continue posting modestly higher revenue while improving key financial metrics like cash flow and earnings.
The good news is that the stock is priced to reflect many of Wall Street's most bearish expectations. Investors are paying below 5 times annual sales for this business, down from the pandemic peak of over 120 times revenue.
That discount could pave the way for improving returns from Zoom stock in the next year, but only if the business can show progress at reaccelerating growth back toward the double-digit range. Until that happens, investors can expect Zoom shares to continue trailing the market into 2024.
