Zoom Stock Down 90%: Time to Buy?

Zoom Video Communications Inc

Zoom Video Communications (NASDAQ:ZM) emerged as one of the top performers in the tech sector during the COVID-19 pandemic, experiencing a surge in demand for its solutions amidst global lockdowns. However, the stock has since plummeted approximately 90% from its peak, now valued at $19 billion. Is Zoom finally presenting a buying opportunity?

Zoom offers a comprehensive collaboration platform facilitating seamless online connections, including team chat, phone meetings, recording capabilities, and a cloud contact center. Despite the substantial downturn in share prices, I see Zoom Video as an undervalued investment prospect at present, driven by its AI initiatives, improving financial performance, and attractive valuation.

Zoom’s revenue trajectory has shown steady growth, increasing from $622 million in Fiscal 2020 to $4.52 billion in Fiscal 2024. In the most recent quarter, Q4 of Fiscal 2024, the company reported revenue of $1.146 billion, marking a 2.6% year-over-year increase. While Enterprise sales experienced growth of 4.9%, Online sales dipped slightly by 0.5% in the same period.

The expansion of Zoom’s customer base and heightened spending from existing customers have been key drivers of its revenue growth. Notably, the company ended Fiscal 2024 with 220,400 enterprise customers, with a net dollar expansion rate of 101%, indicating increased spending by existing customers.

With a strategic focus on integrating AI capabilities across its product offerings, Zoom aims to enhance customer retention and engagement. This includes automating customer service interactions and leveraging conversational intelligence software to improve sales team productivity. Notably, Zoom’s AI Companion software launched recently, has already seen significant adoption, with over 510,000 accounts enabled.

In addition to revenue growth, Zoom has prioritized improving its profit margins by optimizing its cost structure. This focus has resulted in notable achievements, such as a rise in net income to $298.8 million in Q4 of Fiscal 2024, compared to a net loss in the same period the previous year. Moreover, the company’s adjusted net income for Fiscal 2024 expanded by 23% year-over-year, alongside a significant increase in adjusted free cash flow margin to 33%.

Analysts’ sentiment towards Zoom stock remains mixed, with a consensus rating of Hold. However, the average price target of $77.68 suggests a potential upside of 26% from current levels. With forward earnings multiples indicating an undervaluation compared to sector medians, Zoom presents an intriguing opportunity for investors.

In summary, while Zoom faces near-term challenges in sales growth and margin expansion, its AI initiatives hold promise for driving future growth and enhancing profitability. Furthermore, a solid cash flow base provides the company with the flexibility to pursue strategic acquisitions and fuel revenue expansion in the coming years.

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