Zoom Communications (ZM +0.39%) stock has registered healthy gains since hitting a 52-week low around mid-August last year. The stock rose an impressive 37% in just over six months thanks to its gradually improving growth profile, which is being driven by the rising demand for its AI-focused communications tools.
However, Zoom stock has witnessed a sharp drop recently as the company's latest quarterly report showed signs of cracks in its growth story. Management released its fiscal 2025 fourth-quarter results (for the quarter ended Jan. 31) on Feb. 24. Though its numbers were ahead of consensus estimates, the stock fell over 8% the following day.
NASDAQ: ZM
Key Data Points
Analysts, however, remain upbeat about the stock's performance in the coming year. Its 12-month median price target of $92, as per 38 analysts covering the stock, points toward a potential upside of 21% from current levels. But can Zoom meet Wall Street's expectations and deliver such gains?
Let's find out.
Zoom's growth story shows signs of cracking
Zoom finished fiscal 2025 with a 3.3% increase in revenue to roughly $4.7 billion in constant currency terms. Its earnings increased at a slightly faster 6.3% year over year to $5.54 per share on a non-GAAP basis.
However, its fiscal 2026 guidance does not inspire confidence. The company expects its revenue growth to slow down this year, while earnings per share are expected to drop to a range of $5.34 to $5.37.
A closer look at some key metrics for the quarter will make it clear why the company's forecast is gloomy. First of all, its enterprise customer base is barely growing. It reported 192,600 enterprise customers at the end of the previous quarter, which was hardly an improvement over the 191,000 customers it had at the beginning of the fiscal year.
Zoom's remedy for the stagnating enterprise customer base is to stop reporting this metric from the current quarter. However, management points out that it will "provide this metric in the appendix of our investor deck through the end of fiscal year 2026," suggesting that it will end as a footnote in the quarterly presentation.
The second reason investors pressed the panic button following the latest results is doubts about the stickiness of its customer base. This was evident from a decline of 3 percentage points in its net dollar expansion rate last quarter compared to the year-ago period. Zoom calculates this metric by dividing the annual recurring revenue (ARR) from its enterprise customers at the end of a quarter by the ARR from enterprise customers in the same period last year.
So, the decline in this metric indicates that its enterprise customers are spending less on its platform. This doesn't bode well for the company since it gets 60% of its revenue from enterprise customers. Another negative from the latest quarterly report was that its online monthly average churn increased slightly on a quarter-over-quarter basis to 2.8%.
Of course, this figure was down by 20 basis points from the year-ago period, but the quarter-over-quarter increase along with the stagnating customer base suggests that Zoom is finding it difficult to keep customers hooked onto its cloud communications platform.
The valuation is cheap, but the stock doesn't look like a smart buy right now
We have already seen that analysts are expecting Zoom stock to jump 21% in the coming year. However, the company's guidance for a contraction in its bottom line, along with slower revenue growth, could keep it from delivering such gains. That's because the stock market doesn't have enough incentive to reward the company with a richer valuation.
At the time of this writing, Zoom currently trades at just 23 times earnings, which is well below the tech-laden Nasdaq-100 index's earnings multiple of 30. But this cheap valuation doesn't make this tech stock worth buying unless and until there are concrete signs of acceleration in its growth.
