Zoom Video Communications (ZM) hasn’t been on my watchlist simply because the stock is too expensive versus its earnings forecast. My bearish stance has been reinforced by the recent Q3 earnings beat and guidance. For ZM stock to justify its current valuation, it requires much stronger results and guidance than what was provided. Coupled with contracting free cash flow, I’m expecting this pandemic-era winner to fall further in what can be a punishing market for underperforming stocks.
Don't Miss our Black Friday Offers:
- Unlock your investing potential with TipRanks Premium - Now At 40% OFF!
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
Zoom’s Earnings Beat Wasn’t Spectacular
Zoom’s beat-and-raise quarter failed to impress investors. It has reinforced my bear case. The company reported adjusted earnings of $1.38 per share, surpassing analyst expectations by $0.07, while revenue grew 3.6% year-over-year to $1.18 billion. Despite these positive results, the market’s lukewarm response highlights the challenges Zoom faces in maintaining its growth momentum.
While Zoom’s performance exceeded expectations in Q3, the growth rate was modest compared to its previous years’ substantial beats, potentially indicating a broader slowdown. The company’s revenue increase of 3.6% year-over-year, though an improvement, is far from the explosive growth seen during the pandemic era. This is likely contributing to investor caution.
Enterprise revenue, a key focus area for Zoom, grew by just 5.8% to $698.9 million, while online revenue remained relatively flat at $478.7 million. While there were some positive signs with regard to churn — monthly churn fell to an all-time low of 2.7% — the broader picture pointed to some headwinds.
Zoom’s guidance for the upcoming quarter ($1.29 vs. the Street’s estimate of $1.28) and Fiscal 2025 were slightly above analyst estimates, but the incremental improvements were not enough to excite investors. The company raised its full-year revenue outlook to $4.66 billion, up from the previous range of $4.63 billion to $4.64 billion.
Zoom’s Growth Forecast Simply Isn’t Exciting
Moreover, Zoom’s near-term growth forecast simply isn’t strong enough to satisfy investors or the valuation, compounding my bear case. With the stock trading at a price-to-earnings-to-growth (PEG) ratio of 1.94 — a 3% premium to the sector — investors were looking for more substantial growth catalysts or clearer signs of the company’s ability to thrive in a post-pandemic environment.
Looking more broadly at growth forecasts, the long-term EPS growth projection of 8.4% over the next 3-5 years is significantly lower than the sector median of 15.3%, indicating a less-than-impressive outlook for the company’s future earnings potential.
Moreover, while Zoom has been investing in artificial intelligence (AI)-powered tools and expanding its enterprise offerings, these initiatives don’t seem to be translating into noticeable earnings growth. Zoom’s AI Companion 2.0 may soon contribute to growth, but it’s also worth noting that video communications peers are making similar moves.
The modest revenue growth forecast is compounded by free cash flow concerns. Zoom’s guidance for Q4 fiscal 2025 implies a free cash flow of approximately $240 million, a significant drop from the $333 million reported in the same quarter last year. This projected decline in free cash flow is especially troubling for investors who were willing to overlook sluggish growth rates in exchange for strong cash generation.
Lackluster revenue and earnings growth coupled with diminishing free cash flow collectively paint an unattractive investment picture for Zoom.
Zoom’s Margins Aren’t Enough
Despite my bearish sentiment towards Zoom and the aforementioned concerns, it would be remiss of me not to mention some of the stronger features of this stock. For one, Zoom Video Communications has demonstrated strong profitability metrics, registering a gross profit margin of 75.9%, which was 50.2% higher than the sector median. Moreover, the EBIT margin of 16.2% was 211% above the sector average.
This operational efficiency highlights Zoom’s ability to generate substantial profits from its revenue. Additionally, the company’s strong cash position, with approximately 30% of its market cap consisting of cash and no debt, further strengthens its balance sheet and provides a cushion for future investments and growth initiatives.
Despite these positive aspects, for me at least, Zoom’s margins and cash reserves are not enough to offset concerns about its valuation and growth trajectory. Especially in the current market, I’d expect slow growth to be punished by investors as the post-pandemic reality hits home.
Is Zoom Video Stock a Buy, According to Analysts?
On TipRanks, ZM comes in as a Hold based on six Buys, 15 Holds, and one Sell rating assigned by analysts in the past three months. The average ZM stock price target is $77.47, implying 9.2% downside potential.
The Bottom Line on Zoom Video Communications Stock
I’m bearish on Zoom despite its strong balance sheet and recent earnings beat. The company’s modest revenue growth, compressed margins, and tepid earnings forecast fail to justify its current valuation.
While AI Companion offers promising features, the rollout doesn’t appear transformative enough to drive significant market expansion at this stage. As such, Zoom’s inability to deliver market-beating growth potential, combined with its decelerating free cash flow, makes it a challenging investment in the competitive communications software landscape.
