Zoom on a Path to Recovery: A Look at Recent Financial Results
Once a favorite during the pandemic, Zoom Communications (NASDAQ: ZM) has seen its stock decline from over $550 in 2020. Due to a surge in demand at that time, growth slowed in following years, causing investors to seek more from the company.
Quarterly Performance: Encouraging Yet Underwhelming
In its fiscal 2025 third quarter ending October 31, Zoom reported a revenue increase of nearly 4% year over year, reaching $1.18 billion. This exceeded the analyst consensus of $1.16 billion, according to LSEG. Additionally, adjusted earnings per share (EPS) rose 7% to $1.38, outperforming the expected $1.31.
While large enterprise clients are driving growth, smaller customer segments are struggling. In fiscal Q3, enterprise revenue jumped nearly 6% year over year to $698.9 million, fueled by a 7% increase in customers generating annual revenue over $100,000. Conversely, online revenue remained flat at $478.7 million, with average monthly churn at a record low of 2.7%.
Despite this, net dollar retention for enterprise customers slid to 98%, indicating more losses or reduced spending from existing clients than new expansions.
AI Innovations and Future Plans
To combat these challenges, Zoom is ramping up its artificial intelligence (AI) initiatives. The introduction of its AI-first Work Platform aims to enhance user productivity with tools like the Zoom AI Companion 2.0, designed to summarize conversations and manage tasks.
Plans for next year include launching Custom AI Companion add-ons for specific industries, such as healthcare and education, alongside a new platform for frontline workers in sectors like retail and manufacturing.
Some segments are thriving, particularly Workvivo—the collaboration platform bought last year—with customer numbers rising by 72%. Zoom also recently signed its largest contact center deal, involving 20,000 seats, resulting in an 82% increase in customer counts for this service.
Financially, Zoom remains strong, generating operating cash flow of $483.2 million and free cash flow of $457.7 million during the quarter. As it ended the period with cash and marketable securities totaling $7.7 billion and zero debt, its financial position looks secure.
For the upcoming fiscal year, Zoom raised its revenue forecast to between $4.656 billion and $4.661 billion and adjusted EPS estimates to range from $5.41 to $5.43, up from previous predictions of $5.29 and $5.32 with revenue between $4.63 billion and $4.64 billion.
For fiscal Q4, Zoom projects adjusted EPS between $1.29 and $1.30 on revenue between $1.175 billion and $1.180 billion, slightly above analyst expectations for EPS and in line with revenue predictions.
Image source: Getty Images.
Evaluating Investment Value
Currently, Zoom is not seen as an expensive investment, trading at a forward price-to-earnings ratio (P/E) of 15.5. Its forward price-to-sales ratio (P/S) is just over 5. However, since its cash reserves account for approximately 30% of its market cap, the true valuation of the stock may be inflated. Without considering its net cash, the P/E ratio drops below 11, with an enterprise value-to-revenue ratio sitting at about 3.6.
Investors in the tech sector typically seek growth opportunities rather than merely undervalued companies, making growth potential from new AI-driven initiatives critical. Should Zoom’s AI strategies yield positive results in the upcoming year, the upside could be significant.
With these factors in mind, this may be an opportune moment for investors to consider buying the stock on its dip.
Is Now the Right Time to Invest in Zoom?
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Geoffrey Seiler has positions in Zoom Communications. The Motley Fool has positions in and recommends Zoom Communications. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.
