Zoom Video Communications (ZM 1.57%) has some big questions to answer for investors in late February when it posts its 2023 fourth-quarter results and issues its outlook for 2024. The company's growth hit a wall through most of last year, and Wall Street reacted harshly to that development. The stock rose just 6% in 2023, while the Nasdaq Composite soared 43%.
It's possible this performance gap set investors up for market-thumping gains in 2024 as Zoom's expansion rate speeds back up. It's also possible that management could disappoint shareholders by showing little progress on their growth initiatives.
Let's look at the prospects for a sustained rebound by this beaten-down tech stock.
Expectations for Zoom's growth are modest
Short-term expectations for Zoom are modest around growth, with fourth-quarter sales predicted to rise by just 1% year over year. Most Wall Street pros are looking for full fiscal-year gains of around 3%, too, as revenue lands at $4.5 billion compared to $4.4 billion in fiscal 2023 and $4.1 billion in fiscal 2022.
The good news is that Zoom is seeing decent growth in its enterprise segment that caters to larger companies. The enterprise customer base grew 5% last quarter to 220,000, and existing customers renewed their contracts at slightly higher annual rates, on average.
These positive factors combined to push enterprise revenue up 8%, offsetting declines in the online business that is still shrinking due to post-pandemic demand shifts.
The online segment should stabilize in 2024, and there's room for the enterprise segment to accelerate into double-digit expansion as Zoom adds more services to its communication platform.
Yet the stock isn't likely to see big gains until the company can show a meaningful move beyond the current 3% annual growth rate that Wall Street expects in fiscal 2025.
Zoom has excellent finances
There has been little for investors to complain about when it comes to Zoom's finances. The company is sitting on nearly $7 billion in cash. Free cash flow last quarter was solidly positive at $453 million, translating into a strong 40% of sales. And that figure was up 66% year over year.
ZM free cash flow data by YCharts.
Wins here have allowed Zoom to generate solid and expanding earnings, which helps it stand out as a profitable software-as-a-service business. The cash also gives management plenty of resources it can direct toward research and development, especially around incorporating more artificial intelligence (AI) solutions into the platform. Zoom could consider further large acquisitions in the coming quarters, as well, like last year's purchase of AI specialist Solvvy.
Where Zoom Video stock goes from here
Zoom's stock valuation below 5 times annual sales reflects lots of pessimism about its rebound potential. Shares were priced at over 50 times sales at the pandemic peak, and have collapsed as investors question whether its best growth days are far behind it.
The surest path toward boosting investor returns is for Zoom to make its platform more valuable to the enterprises that are its most reliable source of revenue today. There's no sign yet that Zoom can steadily win market share from larger rivals like Microsoft here, though.
As a result, most investors will want to simply watch this stock through its next few quarterly announcements. Zoom is cash-rich and profitable, yet growth is the missing piece in the bullish investing thesis for this business in 2024.
