Zoom shares down 90 per cent from peak as pandemic boom fades.
This was on of the pandemic super winner turned big loser: Worth Another Look?
Shares of Zoom Video Communications Inc (ZM.O) have tumbled about 90 per cent from their pandemic peak in October 2020 as the former investor darling struggles to adjust to a post-COVID world.
The story for Zoom Video. Communications has been wild in recent years. Now, after building a large cash cushion by connecting the world through unprecedented times, the company took advantage to expand its unified communications platform to deliver better remote and office-based communication solutions to all its customers -- especially enterprise.
WHAT ZOOM DOES
Though widely recognized for its teleconferencing app Zoom Meetings, Zoom Video Communications provides a full suite of subscription-based communications software. Beyond Meetings, the company has also brought into the mix voice communications, chat, scaled event hosting, integrated workspaces, and contact center software to join its platform. All these implementations have been delivered under the steady leadership of founder and CEO Eric Yuan, who left Cisco's (NASDAQ: CSCO) Webex team in 2011 after frustration spurred him to introduce a more advanced videoconferencing technology to the world.
That was during the Covid pandemic peak, what's happened since.
The stock was down nearly 10 per cent on Tuesday after the company cut its annual sales forecast and posted its slowest quarterly growth, prompting at least six brokerages to cut their price targets.
The company, which became a household name during lockdowns due to the popularity of its video-conferencing tools, is trying to reinvent itself by focusing on businesses, with products such as cloud-calling service Zoom Phone and conference-hosting offering Zoom Rooms.
Analysts, however, say any turnaround in the business is still a few quarters away as growth in its mainstay online unit slows and competition from Microsoft Corp’s (MSFT.O) Teams and Cisco’s (CSCO.O) Webex and Salesforce’s (CRM.N) Slack gets intense.
“Zoom has a fundamental flaw – it has needed to spend heavily to keep hold of market share. Spending to cling onto, rather than grow, market share is never a good place to be and was a sign of trouble ahead,” Hargreaves Lansdown equity analyst Sophie Lund-Yates said.
The company’s operating expenses surged 56 per cent in the third quarter as it spent more on product development and marketing. Its adjusted operating margin shrank to 34.6 per cent from 39.1 per cent a year earlier.
Some brokerages believe acquisitions could help revive growth at Zoom, but Chief Executive Eric Yuan said on a post-earnings call that he continued to see heightened deal scrutiny for new business.
“The game is not over for them but without acquisitions this is a multi-year path to returning to higher growth,” Needham & Co analyst Ryan Koontz said.
What to consider today.
As the peak 2020 Zoom fervor has faded, so has the company's stock price. Down 85% from its all-time high and 54% just this year, Zoom has fallen from grace beyond what the company's fundamentals warrant. Zoom continues to deliver solid growth metrics even as many investors have turned away. That reduced mindshare in the public consciousness coincides with a slowing platform usage from individuals and small to medium businesses (SMBs).
Who should invest?
Investors with the patience to see how Zoom's story and cash deployment unfolds over the next 5+ years, at least.
While slowing growth from SMBs might sound concerning, it's important to recalibrate. The rapid shift to remote work and increased videoconferencing over the past few years pulled forward a lot of growth. Zoom's balance sheet is certainly grateful for that unexpected growth, adding almost $4.6 billion in just 2 years to its already substantial cash pile. Still, Zoom's primary target has always been enterprise. As Zoom has refocused its efforts to build out its full communications suite at the enterprise level, it raked in 18% more enterprise customers in the most recent quarter compared to a year ago. And customers who contribute more than $100,000 in annual revenue have increased in number by nearly 37% year over year.
Growth in that primary target market remains quite strong, and importantly, Zoom's current valuation is now more reflective of its goals. Right now, it trades around 22.6 times forward earnings -- comparatively low by recent growth stock standards.
The biggest question remaining for Zoom is: Where will it grow from here? Zoom maintains a net dollar expansion rate of 120% with its enterprise customers, demonstrating their interest in expanded offerings -- Zoom Phone, Zoom Rooms, Zoom Contact Center, and Zoom IQ for Sales. Zoom's growing stockpile of cash and short-term investments, now over $5.5 billion total, leaves it well-positioned to execute on optionality, but we're still watching to see exactly which path it will take.
Trade it or own it sell it? That's up to you.