Is Zoom Stock a Buy Right Now?

Zoom Video Communications (ZM -0.84%) investors are about to get a big financial update on the business. The communications platform specialist’s Q3 report will land on Monday, Nov. 20, and will include fresh data on core growth metrics, profitability, and cash flow. Buckle up for a likely volatile week for the stock.

Investors will be watching that report for signs that Zoom is improving on the weak sales trends it has announced in recent quarters. But waiting for complete clarity might cause you to miss out on some potential gains in holding the stock through the uncertainty. With that idea in mind, let’s look at Zoom’s momentum heading into its late-November quarterly update and decide whether the stock looks like a compelling buy today.

Zoom is seeing faster growth

The stock likely won’t begin beating the market again until management can show progress on accelerating its growth trends. Zoom’s sales rose by just 5% year over year last quarter to $1.1 billion and revenue has barely increased in the first half of 2023. The good news is that Zoom is having success in marketing its services to larger enterprises. That division expanded at a 10% rate last quarter, offsetting a 4% drop in the direct-to-consumer unit.

Yet Zoom needs to do better. Microsoft reported 12% growth year over year in the most recent quarter from a much larger sales base, for context. Ideally, the business can show accelerating revenue gains for Q3, which would ease investors’ worries that its best growth days are behind it.

Zoom is investing the cash

There’s fortunately much more clarity around Zoom’s solid finances. The company maintained profitability through the sharp growth slowdown in recent quarters. It didn’t overstretch on spending during the boom times, either. As a result, Zoom sits on $6 billion of cash today. Free cash flow last quarter was $336 million, too, up significantly year over year.

ZM Free Cash Flow Chart

ZM Free Cash Flow data by YCharts

Those resources provide flexibility for the management team to invest in high-return areas like artificial intelligence (AI). Investors might hear more news on the acquisition front, too, as Zoom works to widen its portfolio of services. Enterprises are increasingly looking to cover more of their productivity and communication needs through a single provider. The quicker that Zoom can establish itself as that diverse platform, the better.

Zoom management provides outlook updates

The main factor that might move the stock in late November is any change to Zoom’s 2024 outlook. That forecast currently calls for sales to land at about $4.9 billion this year compared to $4.4 billion last year.

There’s a chance that management could nudge that prediction higher, especially if Zoom secured several additional large contracts in Q3. On the other hand, slower spending from IT managers could easily elicit a more cautious tone from CEO Eric Yuan and his team. Heading into the announcement, most Wall Street pros expect to see modest sales growth for fiscal 2024 and 2025.

Shares don’t look expensive today. In fact, the current price-to-sales ratio of 4 is close to the lowest that investors have seen for this former Wall Street darling. Zoom was priced at over 60 times annual sales during the booming growth days in 2021, after all.

Two big factors combined to push the valuation much lower. First, Zoom is a much bigger business today, with closer to $5 billion in annual sales versus the $600 million it was booking before the pandemic. But the bigger issue is growth. Zoom can’t deliver market-beating returns as long as it is posting barely positive annual sales gains. Until investors see evidence that demand trends are accelerating toward industry averages, they should simply watch the stock for now.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Zoom Video Communications. The Motley Fool has a disclosure policy.

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