When videoconferencing software company Zoom Video Communications (ZM 1.57%) held its initial public offering (IPO) in 2019, shares began trading around $65. Today, Zoom trades at only $70. In short, it hasn't helped anyone become a millionaire so far -- it's losing to the market, after all.
Counterintuitively, Zoom's business is mind-numbingly bigger now than it was then. In less than five years, its trailing-12-month (TTM) revenue is up close to 1,300%, and it continues to climb. And it has a $6.5 billion pile of cash, cash equivalents, and investments.
ZM Revenue (TTM) data by YCharts.
This much business growth coupled with such lackluster stock returns is a frustrating combination. And for the first time in years, I'm starting to question my investment thesis when it comes to Zoom stock. That said, there is still hope with this investment, as I'll explain.
Why I'm starting to doubt my assumptions
An investment thesis is a short explanation for why a stock will go up. For Zoom stock, I could clearly see that its videoconferencing product would be less popular as the pandemic waned.
However, the company has developed a suite of enterprise products that had promising adoption trends. I believed these would grow substantially. And since this is a high-margin business, I believed ongoing growth from the enterprise business would result in higher profits.
My thesis has been right in many ways but wrong with the outcome, which is why I'm starting to question my assumptions.
Take Zoom Phone for example: a cloud-based service to upgrade phone infrastructure at the office. It only launched in January 2019 and by September 2022 it had already sold 4 million seats to the product. Today it has over 7 million paid seats.
Looking at Zoom Contact Center tells a similar story. The company launched it in February 2022. Today, this product has more than 700 customers, which is incredible growth in what was already a crowded playing field.
The adoption of Zoom's enterprise products has been impressive and on par with my expectations. However, this isn't translating into fast overall revenue growth. During the company's fiscal 2024, which ends this month, management is expecting only 3% full-year revenue growth. This is on top of its paltry 7% year-over-year growth in its fiscal 2023.
In short, businesses are buying Zoom's enterprise products like I had hoped. But the company's revenue has been growing at a snail's pace for too long.
The hope that remains
Zoom's tepid revenue growth could be an issue of timing: Customers sign service contracts, and it takes time for revenue to start rolling in.
Looking at Zoom's remaining performance obligations (RPOs) is slightly more encouraging. In the third quarter of Zoom's fiscal 2024, RPOs were nearly $3.6 billion, and up 10% year over year. This represents services that Zoom intends to provide its customers based on its contracts. Once these deals come to fruition, it suggests that the revenue growth could climb back into the double digits.
Trading at less than five times its trailing sales and at 16 times its free cash flow, Zoom stock is undeniably cheap. Therefore, it might have limited downside. And if its current RPO growth eventually turns into accelerated revenue growth, the stock could begin climbing from this cheap starting point.
ZM PS Ratio data by YCharts; PS = price to sales.
Zoom's $6.5 billion in cash represents a wild card. With a market capitalization of just $21 billion, that's a ton of money at its disposal. It could look for a high-growth acquisition or simply return a lot of that to shareholders. Either use of cash could be meaningful.
Still, after years of slow top-line growth and underperformance with the share price, Zoom stock might be moving toward the "prove it" pile. There's still potential here, but investors might want to wait until there's something to get more excited about before buying more shares.
I can think of dozens of businesses facing a harder path ahead than Zoom. So it's not like this is an outright bad investment idea. That said, for those trying to become a millionaire through investing in stocks, there are probably other choices right now that will better help you on your journey.
