Many companies claim to be artificial intelligence (AI) companies, however, they may only have a single product that integrates the technology.
And while some of these companies are decent investments, one that I wouldn't touch with a 10-foot pole is Zoom Video Communications (ZM +0.39%).
Zoom's AI products don't allow it to stand out in a crowded space
Many people used Zoom's video teleconferencing software since the start of the COVID-19 pandemic. Zoom quickly expanded its business to meet the surge in demand caused by social distancing requirements. However, Zoom Video hasn't done much since that initial wave of signups.
One of the products Zoom has now is a generative AI companion that can auto-respond to missed chats or summarize what you missed in a meeting. While this tool is useful, I'm unsure if it's enough to turn Zoom's business around, as it doesn't differentiate the company from its competition.
NASDAQ: ZM
Key Data Points
One of Zoom's biggest competitors is Microsoft Teams. Teams provides many of the same functionalities as Zoom, but is included in the Microsoft Office suite that almost every business already pays for. Microsoft's Copilot can also do tasks like summarizing meetings or helping respond to chats. With many companies doing everything possible to become more efficient, Zoom's software looks more like a "nice to have" than a "need to have."
With so many "need to have" companies out there, I don't know why investors would waste their time with a company like Zoom Video.
Zoom is hardly growing and doing nothing with its cash
In its fiscal 2024 third quarter, which ended Oct. 31, Zoom's revenue increased at a snail's pace: 3.2% year over year to $1.14 billion. Its growth rate isn't expected to pick up any time soon either, as its revenue guidance for fiscal Q4 was between $1.125 billion and $1.13 billion, which would amount to 1% year-over-year growth at the midpoint.
Revenue growth isn't everything, as mature companies can turn small revenue growth into strong earnings growth by improving margins and repurchasing shares. Zoom has done an excellent job of improving margins, as its operating expenses fell from $765 million in fiscal Q3 2023 to $696 million in fiscal Q4 2024, due to layoffs and other cost cuts. This helped management increase its operating margin from 6% to 15%. With these improvements, Zoom grew its earnings per share (EPS) from $0.16 to $0.47.
ZM Operating Margin (Quarterly) data by YCharts.
Despite the fact that Zoom stock is trading near all-time low valuations, the hasn't launched a stock repurchase program. Furthermore, Zoom has a massive stockpile of cash and marketable securities totaling nearly $6.5 billion, which it could easily deploy to decrease its share count.
This cash isn't doing anything besides earning interest, and even though it could be put to good use by repurchasing shares, management has chosen to do nothing with it.
With hardly any growth, a product that doesn't stand out in a crowded space, plus a massive cash stockpile that isn't being used to its fullest potential, I don't know why anyone would choose Zoom Video in a market full of stocks with vital AI offerings. Zoom had its glory days in 2020 and 2021, but those are long behind it.
