Zoom Video Communications (ZM 1.57%) stock has spent most of 2023 stuck in the penalty box. The communication platform specialist was left out of the recent tech stock rally, and shareholders are in negative territory for the year through mid-October compared to a 30% spike in the Nasdaq Composite index.
That performance gap can be explained by Zoom's slowing growth as management pivots the business toward enterprise sales. But smart investors know there's a lot more to this company than just short-term swings in revenue.
Let's look at three big factors that are likely to drive investors' returns over the next several years.
1. Zoom is expanding its portfolio of services
Zoom's success as a growth stock will depend on its ability to expand its platform enough to attract new customers while convincing existing ones to renew their contracts at increasing annual rates. Performance has been sluggish on this score lately.
Zoom has been busy on the innovation front, to be sure. New services include a flood of features powered by artificial intelligence (AI), along with improvements to its popular phone and video conferencing services.
These successes helped Zoom expand its enterprise customer base by 7% in its most recent fiscal quarter. Combined with modestly higher average annual spending, this uptick pushed the enterprise division higher by 10% through late July. Shareholders are hoping this key metric will accelerate in the coming years.
2. Zoom has strong finances
Smart investors know that Zoom enjoys both a large global sales footprint and an excellent financial position. Those factors set it apart from many other growth companies that overextended themselves on spending during the pandemic and are now working to slash costs.
Cash flow this past fiscal quarter was a healthy $336 million, for example. Zoom is sitting on over $6 billion of cash today as well. Net profit in the first half of fiscal 2023 was $197 million compared to $159 million a year earlier.
ZM Cash from Operations (TTM) data by YCharts.
These positive factors make it unlikely that Zoom will have to rely on debt to fund its business even in the event of a sales downturn. They also mean management has plenty of resources to devote to growth initiatives in late 2023 and beyond.
3. Zoom's valuation suggests it's not quite a growth stock
Three years ago, around the height of the company's pandemic growth surge, investors were paying more than 100 times annual sales to buy Zoom's stock. That valuation fell to a price-to-sales ratio of just 4.3 today.
Part of that valuation-ratio slump can be attributed to the fact that Zoom generates $4.4 billion in annual revenue now compared to less than $800 million before the pandemic. Its ability to expand its revenue from that larger base is naturally more limited. But Wall Street is also assuming that Zoom's best growth days are behind it.
Most Wall Street analysts predict that Zoom's revenue will rise at just a 2% rate this fiscal year and a 4% rate in the following fiscal year. Sales trends will need to accelerate closer to the double-digit percentages for Zoom to earn its way back to growth stock status. As of now, the path toward that accelerating expansion isn't clear. That's why this tech stock looks like a good one to simply watch for now.
