Is Zoom Overcoming Post Pandemic Hurdles with Healthier Financials?

The trajectory of Zoom Video Communications (NASDAQ:ZM) encapsulates the volatile journey of many tech stocks that were thrust into the spotlight during the COVID-19 pandemic. After a good week for the stock, with 4.3% added from the yearly low hit last Wednesday (17th) we take a look under the hood of Zoom a month out from earnings.

As a vital tool for remote communication during lockdowns, demand for Zoom's offerings soared, pushing the stock price from a modest $66.64 on December 27, to an astronomical high of $568.34 on October 19, 2020. Fast forward to the present day, and the scenario has dramatically shifted—Zoom's stock now trades around 90% below its pinnacle, with its market capitalisation hovering at approximately $18.95 billion. Whilst the last week has been better for shareholders, the stock touched a 52 week low, and it will take something significant to shift the dial. Fundamentals and healthier fundamentals may be the ticket.

Despite the significant downturn in its stock price, the company has continued to expand its suite of collaboration solutions, including team chat, phone meetings, cloud-based recording, and a comprehensive cloud contact center. This holistic approach to digital communication has helped Zoom's revenue grow from $188 million in the last quarter of 2020 to an impressive $1.105 billion by 2024.

The customer base has grown steadily, ending 2024 with 215,900 enterprise customers—a year-over-year increase of 9%. More importantly, Zoom’s existing customers are spending more; the net dollar expansion rate for enterprise customers stands at 101%, suggesting a 1% rise in customer expenditure over the last year. This metric is a critical indicator of customer loyalty and potential for future revenue growth.

Zoom is also navigating the technological landscape by integrating artificial intelligence (AI) capabilities to bolster customer retention and engagement. The company is not just staying afloat; it's making calculated moves to target long-term sustenance and growth.

The revenue contribution from products such as Zoom Phone has already surpassed the 10% threshold of total sales, with expectations that the Zoom Contact Center segment will follow suit in the next fiscal year. This diversification of revenue streams may provide the company with a more stable financial base as it matures.

Financially, Zoom has also shown resilience and growth. The adjusted net income for 2024 rose to $1.6 billion, marking a notable 23% increase from $1.32 billion the previous year. Such profitability metrics can provide some comfort to investors wary of tech stocks with high growth but minimal profits.

Wall Street analysts offer a mixed view on the stock's prospects, with six Buy, 16 Hold, and two Sell ratings and an average price target sitting at $77.68. This suggests an upside potential of around 26%, indicating that some analysts see value at current levels.

Analysyt Catherine Trebnick from Rosenblatt has upgraded Zoom Video (NASDAQ:ZM) from Buy to neutral with a $75 price target. Trebnick has cited Zoom's refocused channel strategy that has garnered partnerships like Avaya and Zoom Phone gaining momentum. A “healthy” balance sheet that supports share repurchase generated by better than 30% free cash flow margins, “collectively signal a favourable outlook for Zoom and make it an attractive opportunity,” the analyst tells investors.

In terms of earnings forecasts, Wall Street predicts a slight dip in Zoom's adjusted earnings from $5.21 per share in 2024 to $4.92 per share in 2025. However, there is an anticipation of improvement to $5 per share in 2026, reflecting optimism for a gradual recovery or stabilisation.

Investors contemplating Zoom's stock are faced with various considerations. The current pricing may appear attractive relative to the company's peak valuations, but this must be weighed against future growth prospects, competitive pressures, and the broader economic environment that influences corporate spending on communication solutions. As with any investment, potential buyers should consider their own risk tolerance, investment horizon, and the dynamic nature of the tech landscape before making Zoom a participant in their portfolio.