Zoom Video Communications (ZM 1.57%) -- which soared as the coronavirus peaked and flopped as the pandemic eased -- surprised Wall Street with better-than-expected fourth-quarter earnings and a new $1.5 billion share repurchase program. Shares bounced on the earnings report, which is encouraging for a stock that remains 88% off its former high.
So, is this the beginning of Zoom's resurgence? Or are the stock's best days behind it?
Digging through Zoom's fourth-quarter earnings yielded some surprises. Although the company still must find a way to get top-line growth going again, the stock offers investors a lot of potential upside at this bargain-basement price.
Here is what you need to know.
Zoom still can't grow revenue
Zoom is still struggling to grow. Yes, the company topped analysts' revenue expectations by $20 million, but fourth-quarter revenue grew only 3% year over year. And management guided for $4.6 billion in revenue for fiscal year 2025, just 1.6% over fiscal 2024.
The company is dealing with some international weaknesses. Fourth-quarter revenue was flat in Europe and the Middle East, and sales declined 3% in the Asia-Pacific region. This partly offset the 4% growth in North and South America.
You still want to see better growth, which could ultimately depend on Zoom's ability to increase spending by existing clients, since the company has more than 220,000 enterprise customers today.
Its 101% net revenue retention rate signals that existing customer spending is stagnant. The company is trying to cross-sell new products that are based on artificial intelligence (AI), and it pointed to some traction in the fourth quarter, calling out some notable logo wins in Broadcom and Diageo.
Still, Zoom feels like a car stuck in the mud, spinning its tires but not moving much. Hopefully, revenue increases will accelerate again, but investors might have to be patient and wait at least another four quarters, barring Zoom outperforming its guidance.
Putting all that cash to work
It's not all bad news. There are reasons the stock is attractive despite its struggling revenue growth. For starters, Zoom is an absolute cash flow machine. The company's revenue didn't grow much over the past year, but free cash flow did. It was up 27% year over year to $1.6 billion, a healthy 32% of revenue.
Zoom now has $7 billion in cash and short-term investments against zero long-term debt. That's roughly 36% of its market cap.
Management isn't sitting on its hands, either. The company announced a new $1.5 billion share repurchase program, enough to retire 7.5% of outstanding shares at Zoom's current price.
Generally, low revenue growth is going to translate to low earnings growth. But since Zoom is so profitable and has so much cash, it can financially engineer earnings growth and drive shareholder value.
That's why analysts estimate Zoom's earnings growth could average over 30% annually over the next three to five years.
A tremendous value right now
Share repurchases are tremendously effective at creating shareholder value when the stock is cheap. And Zoom is a bargain today. Shares are trading at a forward price-to-earnings (P/E) ratio of just under 14, a huge discount to the broader market. And even with sluggish revenue growth, the business is poised to grow earnings faster than most.
To see how much Wall Street is doubting Zoom, investors can use the price/earnings-to-growth (PEG) ratio, which compares a stock's valuation to the company's expected growth. I generally buy stocks at a PEG ratio of 1.5 or less; traditionally, a PEG ratio of 1 or less is considered a great buy. Zoom's PEG ratio is only 0.41.
Zoom could fall on its face and grow its earnings at half the pace analysts expect, and the stock's PEG ratio would still be under 1. The market has set expectations remarkably low.
Fortunately, low expectations don't require home-run results to create significant investment returns. Zoom is unfairly cheap for a company so profitable and flush with cash. The stock could be a winner again if Wall Street comes to its senses and realizes that.
