Is Zoom Video Communications Stock a Buy?

Zoom Video Communications' (ZM 1.57%) stock price jumped 8% on Feb. 27 after the videoconferencing company posted its latest earnings report. For the fourth quarter of fiscal 2024, which ended on Jan. 31, its revenue rose 3% year over year to $1.15 billion and beat analysts' estimates by $20 million. Its adjusted EPS grew 16% year over year to $1.42 and cleared the consensus forecast by $0.27 per share.

Those growth rates might seem low, but they indicate Zoom's business is still expanding in a post-pandemic market. Should investors buy Zoom as a value play right now? Or should they ignore it and stick with more promising cloud companies instead?

Image source: Zoom Video Communications.

Zoom's hypergrowth days are over

Zoom became synonymous with videoconferencing during the pandemic. Its catchy brand, simple interface, and freemium model made it more accessible than enterprise-oriented competitors like Cisco Systems' Webex.

In fiscal 2021, Zoom's revenue and adjusted EPS soared 326% and 854%, respectively. In fiscal 2022, its revenue and adjusted EPS grew another 55% and 52%, respectively, even as the pandemic waned. It tried to buy the cloud-based contact center Five9 that year to offset its gradual slowdown, but that deal eventually fell apart.

In fiscal 2023, Zoom's revenue rose 7% as its adjusted EPS fell 14%. Its post-pandemic slowdown dragged on as macro headwinds drove companies to rein in their software spending and aggressive competitors like Microsoft expanded their videoconferencing ecosystems. In fiscal 2024, Zoom's revenue only increased 3% -- but its layoffs and tighter spending boosted its adjusted EPS by 19%.

Data source: Zoom. YOY = year over year.

Zoom's slowdown convinced the bears that its hypergrowth days were over, and its shares shed their premium valuation. At its all-time high of $568.34 on Oct. 19, 2020, the stock had traded for 170 times adjusted earnings for fiscal 2021. Today, it trades for about $70, or only 14 times Zoom's adjusted EPS outlook for fiscal 2025.

An outlook for slow but stable growth

But for fiscal 2025, Zoom expects its revenue to only rise 2% as its adjusted EPS drops 7%. It attributes that earnings decline to its investments in new artificial intelligence (AI) services like its AI Companion, which drafts messages, summarizes meetings, and provides assistance during brainstorming sessions. It's also been adding AI-powered tools to its Zoom Scheduler, which schedules meetings with people outside of an organization; its Intelligent Director, which uses AI to capture the clearest angles during a video call; and its Zoom Virtual Agent chatbot for customer support services.

Those new features could widen its moat and lock in higher-growth enterprise customers, which accounted for 58% of its revenue in fiscal 2024. But it's unclear if those features will reignite its top-line expansion or drive its evolution into a more diversified cloud-based communication services company. So for now, analysts expect Zoom's revenue to only increase at a compound annual growth rate (CAGR) of 3% from fiscal 2024 to fiscal 2026.

Zoom's near-term sales growth looks sluggish, but it still expects its gross margin to rise from 76% in fiscal 2024 toward its "long-term" target of 80% as it expands its data centers to dilute its costs, gains more higher-value enterprise customers, and upsells pricier services like its Cloud Contact Center (which it launched after it failed to buy Five9). The company also just authorized a $1.5 billion buyback plan, which is equivalent to about 7% of its outstanding shares and implies the stock is undervalued.

However, analysts expect Zoom's adjusted EPS to dip 5% in fiscal 2025 and only rise 1% in fiscal 2026. It might beat those estimates with buybacks throughout the year, but that anemic outlook suggests it's running out of room to grow. That might be why its insiders sold more than 3 times as many shares as they bought over the past 12 months.

Stick with other cloud stocks instead

Zoom's stock is cheap for obvious reasons. Its growth has slowed to a crawl in this tough market, and it's ramping up its AI investments to stay relevant. Its decision to plow its free cash flow (FCF) into big buybacks also raises some eyebrows, because a large chunk of those buybacks will likely be used to offset stock-based compensation -- which gobbled up 23% of its revenue in fiscal 2024 -- instead of boosting EPS.

Zoom's business is stabilizing, but it needs to either make some big acquisitions to expand its platform or attract some takeover interest to be worth buying again. Until that happens, Zoom's stock will likely underperform the market as investors focus on better value or growth plays in the cloud space.