The way we work has been reshaped dramatically in the wake of a global upheaval. Accelerated by the COVID-19 pandemic, remote work became not just a necessity but a new norm, transforming kitchen tables into boardrooms and laptops into lifelines. One company at the forefront of this shift is Zoom Video Communications, Inc. (ZM).

From boardroom meetings to virtual happy hours, Zoom became synonymous with our daily work rituals, revolutionizing how teams communicate and collaborate remotely. What began as a video conferencing solution has now evolved into a unified communications and collaboration platform powering the future of work.

However, as the pandemic recedes into memory, the company faces mounting competition from Microsoft Corporation (MSFT) and its Teams communications platform. For instance, MSFT is upgrading its products with artificial intelligence (AI) technology from startup OpenAI. Recently, Microsoft Teams introduced new enhancements, including Copilot in Teams, to enhance collaboration and optimize hybrid meetings.

In response, the company continues to forge ahead with its advancements, such as  Zoom Docs, an upcoming AI-powered workspace for documentation, project tracking, and management tasks. ZM is racing to build more AI tools into its business communications platform, demonstrating its commitment to staying ahead of the curve.  

Additionally, during the fiscal first quarter, ZM reported adjusted earnings of $1.35 per share, exceeding analysts’ expectations of $1.19 per share, and generated revenue of $1.14 billion, which also surpassed the estimated $1.13 billion.

Despite the upbeat financial performance, Zoom’s stock has faced headwinds, reflecting investor concerns amid competitive pressures. The stock has slumped 8.3% over the past month to close the last trading session at $57.81. Moreover, ZM has declined 19.6% in price year-to-date.

Here is what could influence ZM’s performance in the upcoming months:

Zoom Doubles Down on AI

The company is doubling down on AI, assuming it to be the key to driving growth and expanding its business beyond its core video conferencing services. During its first-quarter earnings call, AI took center stage, underscoring Zoom’s substantial investments in this transformative technology and the promising early outcomes of its AI-driven innovations.

On March 25, ZM launched its AI-powered collaboration platform, Zoom Workplace, and introduced 40 innovations to help reimagine teamwork. The platform includes features like AI-powered lighting, noise cancellation, and virtual assistants to enhance productivity and employee engagement.

Zoom Contact Center, another major AI initiative, has also achieved a significant breakthrough. According to founder and CEO Eric Yuan, the platform has matured and is now positioned as “ready for prime time.” Its comprehensive suite includes AI-powered agent support, chatbot functionalities, and advanced analytics capabilities.

Other Developments

On May 21, ZM announced that post-quantum end-to-end encryption (E2EE) was available globally for Zoom Workplace, specifically Zoom Meetings, with Zoom Phone and Zoom Rooms coming soon. The launch of the new security enhancement makes ZM the first UCaaS company to offer a post-quantum E2EE solution for video conferencing. The upgrade addresses future threats from quantum computers capable of decrypting current encrypted traffic later, a proactive measure to enhance data protection.

Solid Financial Performance

For its fiscal first quarter, which ended April 30, 2024, ZM’s revenues increased 3.2% year-over-year to $1.14 billion, while its Enterprise revenue came in at $665.7 million, up 5.3% year-over-year. Its gross profit mirrored revenue growth, rising 3.2% from the year-ago value to $867.93 million.

Non-GAAP income from operations increased 8.1% year-over-year to $456.59 million. The company’s non-GAAP net income and net income per share increased 20.7% and 16.4% from the prior year’s quarter to $426.32 million and $1.35, respectively. Also, its free cash flow (on a non-GAAP basis) stood at $569.68 million, up 50.4% year-over-year.

Moreover, the company expanded its customer base to 3,883 customers, generating over $100,000 in trailing 12-month revenue by the end of the first quarter, an 8.5% increase from the previous year.

Discounted Valuation

In terms of forward non-GAAP P/E, ZM is trading at 11.63x, 50.3% lower than the industry average of 23.43x. Likewise, the stock’s forward EV/EBITDA and EV/Sales multiples of 5.92 and 2.36 are 59.5% and 19.5% lower than the respective industry averages of 14.60 and 2.93.

Moreover, ZM’s forward EV/EBIT ratio of 6.23x is 69.5% below the industry average of 20.43x. Also, its 10.06x forward Price/Cash Flow ratio compares to the industry average of 23.46x.

Robust Profitability

ZM’s trailing-12-month gross profit margin of 76.18% is 53.8% higher than the industry average of 49.54%. Similarly, its 18.09% trailing-12-month EBITDA margin is 85.4% higher than the industry average of 9.76%.

Furthermore, the stock’s trailing-12-month net income margin, ROCE, and ROTA of 18.37%, 11.31%, and 8.14% compares to the industry averages of 2.81%, 4.04%, and 1.59%, respectively.

POWR Ratings Exhibit Solid Prospects

ZM’s robust fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ZM has a B grade for Value and Quality, which is consistent with its lower-than-industry valuation and high-profit margins.

ZM is ranked #5 in the 79-stock Technology – Services industry.

Beyond what we’ve stated above, we have also rated the stock for Growth, Momentum, Stability, and Sentiment. Get all ZM ratings here.

Bottom Line

Despite the near-term challenges in a post-pandemic landscape where demand for video conferencing has somewhat stabilized, ZM remains well-positioned to invest in its AI-driven growth strategy. The company has a solid financial footing to fund its AI initiatives with $7.40 billion in cash reserves and a $1.5 billion stock buyback program.

Moreover, recent enhancements aimed at improving user experience and flexibility further bolster Zoom’s appeal in the evolving remote and hybrid work landscape. As these trends continue to shape the future of work, ZM appears well-positioned for sustained growth and could be a solid buy now.

How Does Zoom Video Communications, Inc. (ZM) Stack Up Against Its Peers?

While ZM has an overall grade of A, equating to a Strong Buy rating, you may also check out these other stocks within the Technology – Services industry: Leidos Holdings, Inc. (LDOS), Dropbox, Inc. (DBX), and RADCOM Ltd. (RDCM), which also carry A (Strong Buy) ratings.

To explore more A-rated Technology – Services stocks, click here.

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ZM shares were unchanged in premarket trading Tuesday. Year-to-date, ZM has declined -19.61%, versus a 14.54% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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