Investors who gave up on Zoom Communications (ZM -1.90%) might want to give this cloud software giant another look. Even as the stock remains down 85% from its October 2020 peak, an ongoing operating and financial resurgence is propelling shares to their highest level in nearly two years.
It's true Zoom no longer has the same blistering growth achieved during the pandemic when virtual meetings were a must for people working and learning from home. That being said, what's emerged is a company more diversified and profitable than ever. There's an opportunity for investors to buy into an industry leader whose expectations have been rightsized by the market.
Let's explore why Zoom Communications could be a smart addition to your portfolio.
AI-powered Zoom Workplace
It's been a few years since Zoom took the world by storm, crossing over into the pop culture lexicon to become synonymous with all online meetings. Several features, including screen-sharing, virtual whiteboards, and co-hosting, all delivered through an easy-to-use interface, were seen as game changers compared to traditional video conferencing options.
The challenge for Zoom has been to stay relevant, not only as the return to office dampened its growth, but also as it navigates an intensely competitive landscape. Alternative solutions such as Teams from Microsoft and Webex by Cisco Systems now match Zoom's once-unique capabilities, making features like screen-sharing and virtual whiteboards the industry standard.
But Zoom continues to innovate by evolving its offerings into a broader unified communications ecosystem.
The company added a suite of business productivity tools integrated with generative artificial intelligence (AI) that automates workflows as a virtual assistant to improve the user experience. Ultimately, Zoom's future is in this AI-first Workplace platform that expands the addressable market well beyond video meetings with specialized and industry-specific applications.
Image source: Getty Images.
Steady profitable growth
Zoom claimed multiple milestones this year amid its new growth drivers. In the fiscal 2025 third quarter (for the period ended Sept. 30), total revenue increased by 4% year over year while adjusted earnings per share (EPS) were $1.29, up 7% from a year ago. Notably, both headline metrics came in above Wall Street expectations.
The performance indicator that stood out was that 3,995 Zoom customers each contributed more than $100,000 in annual revenue, up 7% from last year. This is important as it suggests Zoom is building momentum within the larger enterprise market. Churn at 2.7% declined to its lowest level ever, which provides some confidence for the growth to continue. Management projected optimism into that outlook by hiking full-year guidance. Zoom now expects fiscal 2025 annual revenue growth between 2.8% and 3% compared to a prior 2.3% to 2.5% estimate. The company is now targeting full-year adjusted EPS growth of around 4% from last year.
| Metric | Prior Fiscal 2025 Estimate | New Fiscal 2025 Estimate |
|---|---|---|
| Revenue | $4.63 billion to $4.64 billion | $4.65 billion to $4.66 billion |
| Revenue growth (YOY) | 2.3% to 2.5% | 2.8% to 3% |
| Adjusted EPS | $5.29 to $5.32 | $5.41 to $5.43 |
| Adjusted EPS growth (YOY) | 1.6% to 2.1% | 3.8% to 4.2% |
Data source: Zoom Communications. YOY = year over year.
What's next for Zoom Communications
Zoom Communications offers solid fundamentals including steady growth, accelerating free cash flow, and a balance sheet with zero debt. That's a great starting point when thinking about a potential investment.
What's also interesting is the company's attractive valuation with shares trading at 16 times its full-year consensus EPS as a forward price-to-earnings (P/E) ratio. This level marks a deep discount to software application giants like Microsoft, with a forward P/E of 34, or Salesforce, at 36. While it's fair that these mega-cap leaders deserve a valuation premium based on their currently stronger top-line growth, there's a case to be made that Zoom is undervalued with room for its earnings multiple to converge higher.
The bullish case is that its results over the next several quarters reaffirm the budding comeback story. Evidence that the Zoom Workplace platform is gaining traction in the business productivity collaboration category, precisely at the expense of these larger competitors, should be a catalyst for the stock to sustain a rally higher.
ZM PE Ratio (Forward) data by YCharts
Final thoughts
Zoom Communications checks off several items on a list of what I consider a no-brainer stock: a great company at a bargain price, positioned to deliver positive shareholder returns. That doesn't mean the idea comes without risks, but investors with a long-term horizon can find a spot for Zoom stock within a diversified portfolio.
