Zoom Video Communications, the world’s fastest-growing technology company during the pandemic, has experienced a significant surge in growth with three consecutive quarters of 355% or higher. However, as the economy reopens, Zoom has been challenged to sustain this momentum. To counter this, the company has expanded its offerings beyond web meetings and introduced various software solutions such as contact centers, webinars, chat, email, and artificial intelligence tools.
A Slight Decline in Growth
Despite their best efforts, Zoom’s growth has slowed down in recent times. The company is expected to report its sixth-straight quarter of single-digit revenue growth, raising concerns among investors. Reflecting this unease, Zoom stock (ticker: ZM) has seen a 5% decline this year, with a further 4% drop since their last financial report.
Projections for the October Quarter
For the upcoming October quarter, Zoom projects a revenue range between $1.115 billion and $1.2 billion. Their non-GAAP profits are expected to fall between $1.07 and $1.09 per share. As per FactSet’s consensus estimates, analysts predict a revenue of $1.119 billion, reflecting a modest 1.5% increase, along with profits of $1.08 per share.
Expectations for the Fourth Fiscal Quarter
Looking ahead to the fourth fiscal quarter ending in January, analysts anticipate a 1% year-on-year revenue growth for Zoom. An estimated $1.129 billion in revenue is projected, accompanied by earnings of $1.09 per share.
Forecast for the January 2024 Fiscal Year
Zoom’s outlook for the January 2024 fiscal year indicates a predicted revenue range of $4.485 billion to $4.495 billion, marking a 2% increase. Adjusted profits are estimated to be between $4.63 and $4.67 per share. Consensus estimates by analysts align closely with Zoom’s forecast, indicating revenue of $4.492 billion and earnings of $4.68 per share.
The Challenge of Rising Competition
While Zoom’s expansion into new services offers potential for long-term growth, the company also faces fierce competition, particularly from Microsoft Teams, which is bundled with Office. This intensifying competition adds another layer of difficulty for Zoom as it strives to maintain its market position and continue its upward trajectory.
Zoom’s Confidence Relies on Business Recovery and Potential Acquisitions
Morgan Stanley analyst, Meta Marshall, predicts that Zoom’s stock value is unlikely to experience significant changes until investors regain confidence in the company’s online business. This refers to the smaller customers who were drawn to the platform during the pandemic. Marshall maintains an Equal Weight rating on Zoom shares.
Marshall raises questions about when Zoom’s new products will stimulate a resurgence in the company’s enterprise business. Additionally, she wonders when Zoom will utilize its strong financial position to make strategic acquisitions. Currently, Zoom holds $6 billion in cash and short-term investments, which is about 31% of its market capitalization.
Marshall does not believe that any of these issues will be resolved by the October quarter results.
Citi analyst, Tyler Radke, who has previously held a negative outlook on Zoom shares, recently upgraded his rating to Neutral from Sell. He stated that the stock is currently trading at low multiples. Radke is eagerly awaiting signs of business stabilization, as recent surveys indicate a potential easing of the challenges faced by Zoom. However, he also acknowledges that Zoom still faces significant risks, particularly the competitive threat posed by Microsoft (MSFT).
On the other hand, Baird analyst, William Power, remains optimistic about Zoom’s prospects and maintains an Outperform rating on the stock. Power believes that Zoom’s enterprise business performed better than the online segment in the quarter, possibly due to the company’s new artificial intelligence (AI) features.
“We believe that the stock holds considerable long-term value for investors,” wrote Power, “as accelerating revenue remains a crucial catalyst.”