Investors may have reawakened to the potential of Zoom Video Communications (ZM 1.57%). Its performance has lagged since the pandemic-induced bump in usage sent its stock to an intraday high of almost $589 per share in late 2020.
The stock sells at nearly a 90% discount to that peak, and since that time, the company has redefined itself more explicitly around a communications ecosystem. Those improvements inspired Cathie Wood's Ark Invest to forecast an expected price of $1,500 per share by 2026.
Given the company's recent growth, even the Ark Invest bear case of $700 per share in 2026 seems doubtful. Nonetheless, investors may want to still consider buying Zoom stock for three key reasons.
1. Remote work trends continue to favor Zoom
Admittedly, citing remote work trends as a reason to buy Zoom stock may seem strange in today's environment. Employers have become increasingly insistent that workers come into the office at least part-time. Also, Microsoft Teams and Alphabet's Google Meet mean that Zoom has to stand out above well-funded megatech competitors.
However, workers often do not go into the office every day, an indication they still need the tools that Zoom offers. Additionally, Zoom is not counting on its online meetings tool to carry the company. It has added VoIP calling, email, whiteboards, video, and other tools in one communications-based ecosystem.
Furthermore, it has leveraged artificial intelligence (AI) to enhance this tool, including an AI-driven virtual assistant. This can perform functions such as summarizing meetings, generating follow-up tasks, and organizing whiteboard content and videos. Such add-ons can help it leverage its lead in the online meeting space to foster additional revenue sources.
2. Zoom is improving its financials
Despite its innovations, Zoom has struggled with growth. In 2023, revenue increased by only 3% yearly to about $4.5 billion. Admittedly, that rate of increase is unlikely to inspire growth investors, particularly because Zoom forecasts a 2% rise in revenue in 2024.
However, it reduced its operating expenses over time. Also, with improved returns on strategic investments, Zoom's net income was $637 million in 2023, up from $104 million the previous year.
Moreover, Zoom generated nearly $1.5 billion in non-GAAP (adjusted) free cash flow during 2023. That led to a free-cash-flow margin of 33%, up from 27% in 2022. This cash gives Zoom tremendous optionality, including investing in its business or returning cash to shareholders.
3. Zoom has a $1.5 billion share buyback program
It appears most of that free cash flow will go back to shareholders in the form of share repurchases. In its year-end earnings announcement, Zoom announced that its board authorized a share buyback program amounting to as much as $1.5 billion. At today's prices, that would remove over 22 million of the 304 million outstanding shares.
Amid fluctuating share prices, it is unclear how many shares will come off the market. Nonetheless, fewer shares available should mean higher stock prices for current shareholders. Additionally, if it can continue improving profitability and free cash flow, Zoom stock could continue rising even if the company's lackluster revenue forecast does not improve.
Making sense of Zoom stock
Although Zoom stock may fall short of Ark Invest's optimistic growth projections, investors have good reason to consider the pandemic darling. The company has expanded its offerings since the pandemic, and thanks to those improvements, it could become a one-stop shop for business communications.
Moreover, modest revenue improvements have led to considerable increases in profitability and free cash flow. With most of that free cash flow likely going to share buybacks, the dwindling supply could boost the stock price.
Admittedly, revenue growth will have to improve over time for Zoom to return to record highs. However, since it can drive significant growth from modest revenue increases, Zoom has positioned itself to beat the market in the near term.
