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Not long ago, Zoom Video Communications (ZM) was the darling of the pandemic-era stock market. As demand for remote connectivity solutions surged amid the shift to remote work and school, Zoom's easy-to-use video platform became a household name almost overnight. Share prices skyrocketed over 765% from the end of 2019 to the October 2020 peak, as annual revenue ballooned.
But then post-pandemic life returned, and Zoom came crashing back down to earth just about as quickly as it had soared. The stock is down 88% from those 2020 highs, and Zoom shares have underperformed the broader equities market amid this year's impressive rally.
That said, the stock is now attractively priced at current levels, and Zoom's latest earnings beat expectations, even as growth slowed again. So is this tech stock worth scooping up right now for a potential comeback in 2024 - or is ZM a value trap to sidestep? Let's take a look.
Zooming In on a Video Call Giant
Zoom Video stock has underperformed not only the tech-heavy Nasdaq-100 Index ($IUXX) in 2023, but it's also fallen behind the broad-based S&P 500 Index ($SPX). Since the start of the year, ZM is up just 7%, compared to gains of 53% for the NDX and 23% for the S&P 500.
Notably, ZM was removed from the NDX with today's rebalancing, alongside other significant laggards like Lucid Group (LCID). This administrative adjustment typically results in some selling from institutional players who no longer need to hold ZM shares to track the benchmark index - but given ZM was the index's 95th holding by weight, the impact could be fairly muted.
In fact, since bottoming out around the round $60 level in November, Zoom stock has been on the rise, up by around 20% from those 52-week lows. Along with a general upside bias in the stock market last month, ZM gapped higher in late November after a well-received quarterly earnings report.
On the plus side, the stock remains reasonably priced at current levels. ZM's forward p/e ratio of 14.47 is well below the tech sector median of 24, and the shares are priced at 12.54 times cash flow and 2.84 times book. This significant compression in Zoom's valuation suggests the stock might be undervalued.
Zoom Beats on Q3 Results
Zoom is facing some tough competition in the video conferencing arena, going head-to-head with big players like Microsoft (MSFT), Google (GOOG), and Cisco (CSCO). These giants are pushing their own video conferencing solutions, bundled with productivity tools that might be more tempting for businesses. And indeed, Zoom's sales growth slowed for the ninth straight quarter as the world adjusts to less feverish demand for video conferencing post-COVID.
However, in Zoom's fiscal third quarter of 2024, they reported earnings of $1.29 per share, beating the expected $1.08 per share. Likewise, revenue was $1.14 billion, which surpassed the expected $1.12 billion. Plus, operating cash flow surged 67% to $493.2 million.
Enterprise revenue was up more than 7% year-over-year to $660 million, as that customer base grew by 5% from the year-ago period to 219,700. The number of customers contributing more than $100,000 to revenue on a trailing 12 months basis rose 13.5% year over year.
What's Next for Zoom in 2024?
Looking ahead, Zoom expects FY 2024 revenue in the ballpark of $4.56 billion to $4.58 billion, implying 2.5% growth from the previous year. On the earnings front, they're aiming for adjusted earnings between $4.93 and $4.95 per share. Analysts, meanwhile, are targeting full-year adjusted EPS of $4.95 on revenue of $4.51 billion.
For fiscal 2025, the consensus is targeting continued revenue growth to $4.66 billion, with adjusted EPS expected to decline to $4.68.
Analysts aren't exactly in Zoom's corner, with the majority calling the stock a “Hold.” However, among the 24 analysts in coverage, 4 are shouting “Strong Buy,” 1 gives a nod to “Moderate Buy,” and 19 are settling for “Hold.” The stock has zero “Sell” ratings, which is an improvement from a month ago.
The average price target is $79.35 is a solid 11% premium from current levels - and the Street-high target of $100 implies expectations for ZM to rally almost 40% over the next year.
Bargain or Bust?
The plummeting share price seems to make Zoom stock temptingly cheap. However, slower growth and fierce competition create uncertainty about its prospects. On the plus side, Zoom still produces strong cash flow margins, even on slower sales growth - and the company hopes its artificial intelligence (AI) initiatives can help retain enterprise customers.
Yet it’s unclear whether Zoom has any durable competitive edge as video conferencing becomes commoditized, and whatever moat it once had seems to be evaporating. So Zoom carries some operational risks, despite seeming undervalued. But for investors willing to stomach the risks, this beaten-down stock could deliver some upside over the next year if the company continues to execute - or potentially scores a buyout bid from a bigger tech rival. That said, prospective Zoom bargain buyers should buckle up for a potentially bumpy ride.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
