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. Zoom Video Communications (ZM -0.87%) — which soared as the difference between foreign bonds and eurobonds 2020 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.

  1. At the end of 2021, Microsoft reported 270 million users of its Teams platform, growing to 300 million by the end of 2022 and 320 million as of the most recent financial report.
  2. Overall, SBC will be down slightly from fiscal FY23 levels but remain elevated.
  3. Even if I maintain my 15x fair value multiple, the slightly higher EPS expectations only allow for a minor target price increase to $73 per share, based on my FY25 EPS projection.
  4. To me, this is one of my biggest concerns regarding an investment in Zoom, as management does not seem to care and continues to dilute shareholders.
  5. And this is reflected in its FY23 results and FY24 outlook with growth of just 7% and 1%, respectively.

In light of these considerations, the recommendation remains a sell, with the expectation that Zoom is likely to underperform over the next 12 months. Investors are advised to approach the stock cautiously, considering alternative opportunities in the market, especially given the current high-interest rate environment. Financially, Zoom has outperformed expectations in 2023, showing resilience in revenue and achieving better-than-expected growth. However, concerns persist, particularly in terms of market share losses, persistent stock-based compensation (SBC) expenses, and the company’s high reliance on M&A for future growth.

Zoom Video – An industry leader facing challenges

Within the videoconferencing industry, there are just three real factors to leverage as a way to set your platform apart from the competition, and these are features, costs, and compatibility. For perspective, as of 2023, 12.7% of full-time employees still work from home, while 28.2% work a hybrid model. Furthermore, 98% of workers want to work remotely at least some of the time. As a result, according to a study by Upwork, 22% of all Americans will be working remotely by 2025, which translates to 36.2 million people, up 87% from 2019 levels.

Overall, SBC will be down slightly from fiscal FY23 levels but remain elevated. This big margin improvement also boosted EPS growth, up 21% YoY to $1.29, bringing the YTD EPS growth to 20%, far above my start-of-the-year estimate of an EPS decline. Cash flows also grew strongly, with FCF up 66% YoY to $453 million, bringing the YTD total to a significant $1.14 billion, representing an FCF margin of 34%.

This research shows that the remote working trend is here to stay and may only increase going forward, which bodes well for Zoom as demand for its platform will remain and most likely grow over time. Zoom Video Communications (ZM -0.87%) stock surged in Tuesday’s trading. The company’s share price closed out the daily session up 8%, according to data from S&P Global Market Intelligence.

We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%.

To me, this is one of my biggest concerns regarding an investment in Zoom, as management does not seem to care and continues to dilute shareholders. There are reasons the stock is attractive despite its struggling revenue growth. 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. The risk/reward profile remains unfavorable for investors, especially as interest rates remain high. At the current time, I believe there are much better opportunities available on the market, and I expect Zoom to keep underperforming over the next 12 months.

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Zoom’s revenue climbed 2.7% year over year in Q4, with growth being driven by its enterprise segment. Enterprise revenue rose 4.9% year over year in the period to reach $667.3 million. Along with moderate sales growth, cost-saving initiatives helped the business significantly improve its financial performance. Operating cash flow rose 66% year over year to hit $351.2 million in the fourth quarter, and the business closed out the year with an operating cash flow margin above 35%. Simply put, based on the current growth expectations and risks involved with accelerating growth, I believe investors should not be willing to pay much of a premium for this company, if anything at all. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth.

Is Zoom Video Communications, Inc. (NASDAQ:ZM) Trading At A 30% Discount?

We discount the terminal cash flows to today’s value at a cost of equity of 8.0%. Furthermore, I still don’t view shares as trading at a discount in any way, as the growth outlook remains somewhat depressed and risks remain significant, even as the company has shown some positive and surprising developments in recent quarters. With the coronavirus emergency long over, the clock is ticking on Zoom Video Communications (ZM). A rebound in revenue growth for Zoom stock depends on its success in the corporate market. And the outlook for ZM stock is tied to whether the company morphs into a broader business communications platform.

Remote learning and needs in telemedicine also boosted demand for Zoom Video’s cloud-based services. Meanwhile, recently told its employees to report to its offices on a more regular basis. Amid Covid-19 emergency, demand for Zoom videoconferencing software surged as businesses told employees to work from home. As of Aug. 23, 2021, Zoom had 240,744,533 outstanding shares of Class A common stock and 56,383,369 outstanding shares of Class B common stock. The U.S. government has been increasing its scrutiny of Zoom on several fronts. In 2020, the United States charged a China-based Zoom executive with conspiring to disrupt videoconference commemorations of the 1989 Tiananmen Square democracy protests.

Looking at the projections of multiple market research agencies, a CAGR of around the 11% mark seems highly likely. This was despite the videoconferencing industry outlook actually looking really decent. Looking at the latest data and estimates, we can see that while the work-from-home trend intensity has definitely eased off from COVID levels, it is here to stay. The number of full workdays from home increased from just 6% pre-pandemic to 50% in the midst of the pandemic and has since retracted to 28% since early 2023, still significantly above the pre-pandemic level.

It’s not clear how much some new product initiatives are contributing to growth. At its annual Zoomtopia user conference in early October, the company said it will not charge customers for use of its AI Companion. Its capabilities include meeting/chat summaries and smart recordings. The Nasdaq composite shot up 43% amid buzz over generative artificial intelligence technology.

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. 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. Even if I maintain my 15x fair value multiple, the slightly higher EPS expectations only allow for a minor target price increase to $73 per share, based on my FY25 EPS projection.

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