Zoom Video Communications Stock: Bear vs. Bull

Zoom Video Communications (ZM 1.57%) posted its latest earnings report on Nov. 20. For the third quarter of fiscal 2024, which ended on Oct. 31, the video conferencing company's revenue rose 3% year over year to $1.14 billion and exceeded analysts' expectations by $20 million. Its adjusted earnings per share (EPS) grew 21% to $1.29 and cleared the consensus forecast by $0.21.

Zoom's stock barely budged after the report, and it remains nearly 90% below its all-time high. Let's review the bear and bull cases to see if it's a turnaround play.

Image source: Zoom.

The key numbers for Zoom

Zoom experienced a massive growth spurt during the pandemic lockdowns as more people used its namesake video conferencing platform to attend online classes, work remotely, and stay in touch with their family and friends. Its catchy brand made it synonymous with video calls, while its streamlined interface gave it an advantage against more complex enterprise-oriented services like Cisco Systems' (NASDAQ: CSCO) Webex.

Zoom's revenue and adjusted EPS soared 326% and 854%, respectively, in fiscal 2021 (which ended in January 2021). Its revenue and adjusted EPS rose another 55% and 52%, respectively, in fiscal 2022, even as the pandemic's worst passed and the video conferencing market cooled off. But in fiscal 2023, its revenue only grew 7% as its adjusted EPS declined 14%.

Zoom's revenue growth remained sluggish over the past year as it faced more macro, foreign exchange, and competitive headwinds. However, its adjusted EPS growth accelerated as it laid off 15% of its workforce and executed other cost-cutting measures.

Data source: Zoom. YOY = Year over year.

For the fourth quarter, Zoom expects its revenue to rise just 1% year over year as its adjusted EPS declines 6% to 7%. That weakness was mainly caused by its slower growth in Europe and Asia, which offset its stronger growth in North America. For the full year, it expects its revenue and adjusted EPS to rise 3% and 13%, respectively.

What the bears will tell you about Zoom

The bears believe Zoom will grow at a snail's pace over the next few years. Analysts expect its revenue to only grow at a compound annual growth rate (CAGR) of 4% from fiscal 2023 to fiscal 2026 -- which would represent a jarring slowdown from its CAGR of 92% from fiscal 2020 to fiscal 2023. That might be why its insiders sold more than three times as many shares as they bought over the past 12 months.

The bears will also point out that Zoom still faces plenty of formidable competitors -- including Webex, Microsoft's Teams, Alphabet's Google Meet, and Meta Platforms' Facebook Messenger -- as the video conferencing market loses its luster in a post-pandemic world. All of those competitors can afford to operate their video conferencing services at a loss to tether more users and businesses to their larger tech ecosystems.

To widen its moat, Zoom needs to evolve into a more diversified cloud communications giant. It nearly accomplished that with a bid for the cloud-based contact center Five9 (NASDAQ: FIVN) in 2021, but that deal eventually fell through.

What the bulls will tell you about Zoom

The bulls will point out that Zoom continues to expand its ecosystem on its own with new AI-powered tools like Zoom Scheduler, which schedules meetings with people outside of an organization; Intelligent Director, which uses AI and multiple cameras to capture the clearest angles during a video call; and its Zoom Virtual Agent chatbot for customer support. It's also expanding its Zoom Phone for audio calls and text messages, Zoom Rooms for a mix of on-site and remote attendees, Zoom Contact Center for intra-office and customer calls, and Zoom IQ for video-based sales team calls.

The company also continues to lock in larger customers, which generate over $100,000 in trailing 12-month revenue, in spite of the challenging macro environment. That higher-value cohort expanded 13.5% year over year to 3,731 customers in its latest quarter -- which suggests it won't be rendered obsolete by its big tech rivals anytime soon.

Its adjusted earnings should also continue to grow at a faster rate than its revenue as it continues to streamline its business. It expects its adjusted operating margin to rise from 35.9% in fiscal 2023 to nearly 39% in fiscal 2024. If Zoom can continue to expand its operating margins and generate double-digit earnings growth, then its stock might just be a bargain for value-seeking investors at 15 times forward earnings.

Which argument makes more sense?

Zoom's business is gradually stabilizing in a post-pandemic market, but its stock simply isn't that appealing when so many other high-quality tech stocks are on sale. So unless Zoom's growth accelerates again and it proves it has long-term staying power in the crowded video conferencing and cloud communications space, I'll keep siding with the bears who believe its upside potential is limited in this challenging environment.