Zoom Video (NASDAQ:ZM) was among the hottest tech stocks amid the dreaded COVID-19 pandemic, as lockdowns led to a spike in the demand for Zoom’s solutions. ZM stock rose from $66 in late 2019 to an all-time high of $559 in October 2020. Today, the tech stock trades ~90% below its all-time high, valuing the company at $19 billion.
Zoom is a collaboration platform that simplifies the process of connecting online. It offers solutions such as team chat, phone meetings, recording, and an omnichannel cloud contact center. I believe the massive drawdown in share prices makes Zoom Video an undervalued stock to buy right now. I am bullish on Zoom due to its foray into AI, improving financials, and a cheap valuation multiple.
How Did Zoom Video Perform in Fiscal Q4 of 2024?
Zoom Video increased its sales from $622 million in Fiscal 2020 (ended in January) to $4 billion in Fiscal 2022. Its sales then grew to $4.4 billion in 2023 and $4.52 billion in 2024. In Q4 of Fiscal 2024, Zoom Video reported revenue of $1.146 billion, up 2.6% year-over-year. While Enterprise sales grew 4.9% to $667.3 million, Online sales fell 0.5% to $479.2 million in the January quarter.
The key drivers of Zoom’s top-line growth are the expansion of its customer base and rising customer spending. It ended Fiscal 2024 with 220,400 enterprise customers, up 3.5% year-over-year. The net dollar expansion rate for Enterprise customers stood at 101%., meaning that existing customers increased spending by 1% on Zoom in the last 12 months.
Additionally, around 3,800 customers spend at least $100,000 annually on Zoom products, up 9.8% year-over-year.
Is Zoom an AI Play?
Zoom aims to expand its customer base by integrating artificial intelligence (AI) capabilities in its product stack, which should translate to higher customer retention, engagement, and spending rates. For example, Zoom automates customer service interactions on its Contact Center product. Further, its conversational intelligence software analyzes customer interactions across meetings with the goal of improving the productivity of sales teams.
Right now, Zoom generates most of its revenue from Zoom Meetings. However, the Zoom Phone now accounts for more than 10% of total sales, and the Zoom Contact Center segment should also surpass this threshold in the next 12 months. Zoom’s add-on AI solutions might generate meaningful revenue as adoption for its core products continues to improve.
Zoom recently launched its generative AI software, AI Companion, which can easily summarize conversations and messages while answering questions related to online meetings. During the Q4 earnings call, Zoom CFO Kelly Steckelberg stated, “Zoom AI Companion has grown tremendously in just five months, with over 510,000 accounts enabled.”
A Focus on Improving Profit Margins
While Zoom increased its sales by 2.6% year-over-year in Q4 of Fiscal 2024, it focused on improving the bottom line by lowering its cost base. For example, Zoom’s net income rose to $298.8 million or $0.98 per share in Q4 of Fiscal 2024 compared to a net loss of $104.1 million or $0.36 per share in the year-ago quarter.
Its adjusted net income for 2024 rose to $1.6 billion in Fiscal 2024, up from $1.32 billion in 2023. So, its net income expanded by 23% year-over-year, which is quite exceptional and showcases the company’s operating leverage.
Moreover, Zoom ended Fiscal 2024 with adjusted free cash flow of $1.5 billion, indicating a margin of 33%, up from 27% in the year-ago period. A high free cash flow margin provides Zoom with the flexibility to reinvest in organic growth and target accretive acquisitions.
What Is the Target Price for Zoom Stock?
Out of the 24 analyst ratings given to Zoom stock, six are Buys, 16 are Holds, and two are Sells, indicating a Hold consensus rating. The average ZM stock price target is $77.68, indicating upside potential of 26% from current levels.
Wall Street expects Zoom’s adjusted earnings to narrow from $5.21 per share in Fiscal 2024 to $4.92 per share in Fiscal 2025. However, earnings are forecast to improve to $5 per share in 2026. So, priced at 12.2x forward earnings, ZM stock is really cheap, given that the sector median multiple is much higher at 24x.
The Takeaway
Zoom is grappling with slower sales and narrowing profit margins in the near term. But its foray into AI should result in solid customer acquisition and retention rates. Further, a widening cash flow base provides Zoom with the room to aggressively consider acquisitions and boost revenue growth going forward.
