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Zoom’s Strategic Turnaround: Leveraging AI and Contact Centers for Growth
Zoom Video Communications saw a significant boost in its share prices after surpassing expectations with its recent quarterly results, although the stock remains slightly down for the year. A closer examination of Zoom’s performance raises the question of whether this is a fleeting improvement or a prime opportunity to invest.
AI and Contact Centers Fueling Growth
Zoom emerged as a significant beneficiary during the pandemic with the widespread adoption of remote work. However, this surge in usage also brought forward demand, resulting in only modest revenue growth in subsequent years. In the second quarter, Zoom’s revenue increased by a modest 2.1% year over year, reaching $1.16 billion, slightly above the analyst prediction of $1.15 billion. Enterprise revenue rose by 3.5% to $682.8 million, while online revenue remained steady at $479.7 million. Adjusted earnings per share (EPS) climbed from $1.34 to $1.39, beating consensus by $0.18.
Notably, customers spending over $100,000 annually grew by 7% to 3,933, contributing about 31% of total revenue. The trailing 12-month next-dollar retention rate for enterprise customers stood at 98%, suggesting a slight downturn due to churn or downgrades. For small self-service clients, the monthly churn hit a record low of 2.9%.
Zoom excelled in the contact center sector, doubling its customer base to over 1,100 and securing its largest contract to date. AI features, such as note summarization and suggestion capabilities, were pivotal in this success. Additionally, Workvivo, acquired last year, experienced growth with high-value customers doubling to 69, and more substantial deals are anticipated.
Looking forward, Zoom has revised its fiscal year projections, now estimating revenue between $4.63 billion and $4.64 billion, with adjusted EPS ranging from $5.29 to $5.32. This is an upward adjustment from previous forecasts. The company anticipates free cash flow of $1.58 billion to $1.62 billion for the year. For the third quarter, revenue is expected to be between $1.16 billion and $1.165 billion, with adjusted EPS between $1.29 and $1.31.
Is It Time to Invest in Zoom?
Zoom’s strong cash flow, substantial cash reserves, and attractive valuation stand out. The stock trades at a forward price-to-earnings (P/E) ratio of 13 and a forward price-to-sales (P/S) multiple of just over 4. Considering that around 36% of Zoom’s market capitalization is in cash, the stock is more affordable than these metrics indicate.
While growth needs to accelerate, particularly in contact centers where AI enhancements have shown promise, Zoom has $7.5 billion in cash, offering flexibility for growth initiatives or acquisitions. It could also consider stock buybacks.
At present, Zoom is an undervalued stock with considerable potential due to its cash reserves and cash flow capabilities. Consequently, purchasing shares at current levels is advisable, even after the recent price increase post-earnings.
Summary:
Zoom Video Communications’ recent quarterly results exceeded expectations, boosting share prices. The company is leveraging AI and contact centers to drive growth, with notable success in these areas. Despite modest revenue growth post-pandemic, Zoom’s financial stability, cash reserves, and valuation make it an attractive investment opportunity.
