Zoom Stock: Prepare for Blast-Off

Based in California, Zoom Video Communications (ZM) provides a video-and-voice teleconferencing platform. I am bullish on the stock.

Remember how hot the stay-at-home stock trade was in 2020? That seems like such a long time ago now, as investors have generally dumped stay-at-home stocks over the past year.

Perhaps this was an over-corrective move as COVID-19 is still around, and remote/hybrid working models are likely to endure. Hence, Zoom stock looks attractive for a buy on extreme pessimism.

Indeed, a recent development suggests that pessimism might already be switching to optimism. There’s fresh data to show that Zoom’s growth story is far from over.

Besides, an important acquisition could help expand Zoom’s business model so that the company can provide greater long-term value to the shareholders. With all of that in mind, let’s log on and see what Zoom has been up to lately.

Redefining the Category

To put it mildly, Zoom stockholders have some catching up to do since the share price is still far below its 2020 peak. Getting back into the $500s won’t be an easy task, so shareholders should be patient and target milestones like $200 and $350 first.

While Zoom stock is definitely down long term, a notable event occurred on May 23 after the stock market closed. Zoom stock shot up 14% in after-hours trading to more than $100, and the stock is still over $100 today. We’ll explore the catalyst in a moment.

First, though, it’s crucial to understand how Zoom is evolving as a business. Frequently, Zoom is used by people and businesses for its basic teleconferencing functions. This is Zoom’s bread and butter, but it’s not a bad idea for the company to branch out and try to capture different addressable markets.

Not long ago, Zoom demonstrated its willingness to expand the company’s business model when it announced the acquisition of Solvvy, which is a conversational artificial intelligence (AI) and automation platform for customer support. With Solvvy, Zoom intends to offer “elevated customer service experiences” while capitalizing on opportunities in the contact center and customer support niche segments.

Apparently, Zoom has added Solvvy’s technology to the recently-launched Zoom Contact Center. This should enhance Zoom Contact Center with scalable self-service and conversational AI, thereby improving the overall experience for customers.

Solvvy co-founder and CEO Mahesh Ram evidently sees this acquisition as having profound implications. “Zoom is poised to redefine the contact center category with its unique combination of unified communication and customer experience,” Ram declared. Indeed, through the power of AI, Zoom and Solvvy could have a transformative impact on modern customer service as we know it.

Future Growth and Expansion

While the Solvvy acquisition is critical, it’s not the only thing that Zoom has done to expand its offerings. As Zoom founder and CEO Eric S. Yuan pointed out, the company “launched Zoom Contact Center, Zoom Whiteboard, and Zoom IQ for Sales” during 2023’s first fiscal quarter, thereby “demonstrating our continued focus on enhancing the customer experience and promoting hybrid work.”

Why did Zoom introduce so many new features/services? Yuan explained, “We believe these innovative solutions will further expand our market opportunity for future growth and expansion with customers.” That’s a fair point, but has this growth strategy translated to better bottom-line results?

For fully-informed investors, the answers should lie within the hard data. As it turns out, Zoom generated total revenue of $1.07 billion during Q1 of Fiscal 2023, up 12% year-over-year. Evidently, this result is in line with what Wall Street’s analysts were expecting.

So far, so good. Yet, Zoom’s first-quarter data release coincided with a strong rally. Surely, an in-line revenue result shouldn’t get the trading community so excited, right?

Maybe not, but there are other results to report. Specifically, Zoom announced first-quarter Fiscal 2023 adjusted EPS of $1.03, beating the analysts’ expectation of $0.87 per share. Also importantly, Zoom reported 2,916 customers contributing more than $100,000 in trailing-twelve-months revenue. This figure represents roughly 46% upside on a year-over-year basis.

In light of these stats, it makes perfect sense that Zoom stock traders are feeling relieved at the moment. There’s really no gloom and doom to report here. Zoom is still profitable and is evidently on the right financial track.

For the current fiscal quarter, Zoom expects to report non-GAAP diluted EPS between 90 cents and 92 cents. In other words, the company seems fairly optimistic about its earnings prospects for the near future.

Wall Street’s Take

Turning to Wall Street, ZM is a Moderate Buy consensus rating, based on 10 Buys and 16 Hold ratings. The average Zoom price target of $138.91 implies 27.5% upside potential.

The Takeaway

It’s not an exaggeration to say that Zoom’s Q1 Fiscal 2023 results were make-or-break for the company. Thankfully, the company isn’t broken and is actually making financial progress.

Therefore, the bearish sentiment surrounding Zoom might finally come to an end. Whether the stay-at-home trade makes a resurgence or not, at least we can say with confidence that Zoom is here to stay.

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