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After the bell on Monday, we received fiscal fourth quarter results from Zoom Video Communications, Inc. (NASDAQ:ZM). Perhaps the biggest pandemic darling, the company has seen its revenue growth rate and stock price fall dramatically from their highs. While shares popped on the initial headline beats that were reported, the company’s revenue growth has all but disappeared.
In my previous article on the company, I had rather mixed feelings about the name rating it a Hold. Key metrics continued to weaken, but the company was still very profitable and producing a lot of free cash flow. The valuation was fair compared to most large-cap tech names, so I had a neutral rating overall. Between that report and now, shares were basically flat (before the after-hours rally), not joining in the double-digit rally, percentage-wise, seen in the overall market. In fact, the stock had greatly underperformed many large-cap tech names that soared to new highs in early 2024.
For fiscal Q4, which ended in January, Zoom saw a lot of the same results as prior periods. Revenues came in at nearly $1.15 billion, beating the street, while non-GAAP EPS of $1.42 beat by 27 cents. I should note, however, that the company has only missed the top line twice in the past five years, and it has never missed the bottom line during that period. That might have to do a bit with management issuing weak guidance quite often, a trend that continued with Monday’s report.
The problem for Zoom is that it’s not showing any signs of a brighter future. As the table below shows, all key metrics showed substantial weakening over the prior year period. For instance, the year-over-year increase in customers contributing more than $100,000 in the trailing 12 months of revenue was just 339, less than half of what was seen a year earlier. The number of Enterprise customers added on both a sequential and year-over-year basis also dropped sharply. Finally, remaining performance obligations were almost dead flat sequentially, with the year-over-year percentage increase barely coming in above the rate of inflation.
Zoom Key Metrics (Company Earnings Reports)
Deferred revenue stood at $1.27 billion at the end of the fiscal year. Over the past 18 months, that’s down by about $130 million, which isn’t a great sign for future top line growth. Thus, it may not be a surprise that Zoom’s guidance was rather light, as fiscal Q1 revenues are expected to be $1.125 billion versus estimates for $1.13 billion. Even worse was the full year forecast calling for $4.60 billion in revenue against the street at $4.66 billion. While management is usually conservative up front and then can raise guidance later, it’d be a lot better to see the guidance at least meet or beat first and then be raised.
The problem is that it is hard to bet against Zoom because of its profitability and cash flow situation. Non-GAAP net income for the year was over $1.6 billion, up nearly $300 million over the prior 12 months, while free cash flow came in at over $1.47 billion, up a similar amount to the rise in adjusted profits. The only issue here is that there’s a lot of stock-based compensation, so the share count is rising a bit over time. On this front, Zoom announced a new $1.5 billion buyback program with the Q4 report, which should help offset this dilution a bit or even get the share count down depending on timing. Zoom did not buy any shares back in the latest fiscal year, but previously executed a $1 billion buyback the year before. The company finished its latest period with about $7 billion in cash and investments, with no debt.
Zoom also trades at a reasonable valuation, so the short case remains quite tricky. While there is virtually no revenue growth here, shares are trading for about 14.4 times adjusted earnings and about 4.7 times sales. A somewhat comparable name like Microsoft Corporation (MSFT) goes for 33 and 11.7 times. If Zoom was actually reporting any meaningful revenue growth here, it would likely have a price-to-sales number in the high single digits and/or a P/E well into the 20s. The street sees another $10 of upside from Monday’s after-hours price, but of course, the average target was nearly $500 here a few years back.
Given the number of positives and negatives here, I am continuing to rate Zoom shares as a hold. I do not like the revenue picture at all and would love to see the name use some of that cash pile on acquisitions rather than buybacks. The declining metrics are a big red flag and some major ones might even turn negative rather soon. On the flip side, the valuation here is quite reasonable, and the company generates sizable profits and cash flow (even with dilution), so I wouldn’t be in a hurry to short. I would even consider a buy recommendation if management made some acquisitions and could show improving metrics for at least a quarter or two.
Interestingly enough, one of Zoom’s major supporters has suddenly sold a chunk of shares. Ark Invest back in 2022 saw Zoom shares rising to $1,500 by 2026 as their Monte Carlo simulations averaged about $52 billion in annual revenue for that calendar period. Now, it looks like Zoom might struggle to do 10% of that top line amount. Between January 30th and February 20th, Ark Invest sold almost 2.9 million Zoom shares, or about 30% of their position. Cathie Wood’s firm owns the stock both in its flagship Ark Innovation ETF (ARKK) and the Ark Next Generation Internet ETF (ARKW).
In the end, Zoom shares rallied Monday after the company’s Q4 report, but the results were not really that great. As usual, the headlines talked about top and bottom line beats, with the company announcing a new buyback program. However, all key metrics continued to weaken, some quite considerably, again leading management to guide quarterly and yearly revenues below street estimates. As bad as the revenue picture is, the profitability and cash flow situation remains strong, so it’s hard to justify either a long or short position here. For now, Zoom remains a hold, but until the revenue picture improves, this name may not exactly outperform its peers.
