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Zoom Video Communications Cl A(ZM-Q)

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Is Zoom Stock a Buy?

Motley Fool - Thu Aug 24, 6:19AM CDT

Investors don't seem to know what to make of Zoom Video Communications(NASDAQ: ZM) these days. The online communications specialist's shares had been up by over 20% in early 2023, but the stock is now trailing the market by a wide margin.

Zoom recently updated shareholders with its fiscal second-quarter earnings announcement. That report was packed with fresh data on sales growth trends, along with key metrics describing the financial strength of its business. Let's take a closer look at whether these factors make the stock a compelling buy right now.

Shifting priorities

During the pandemic, most of Zoom's growth came from its consumer-focused business. Yet today it's the enterprise segment that's making the difference. Zoom's online unit shrank by 4% in the selling period that ran through late July, marking a slight improvement from the prior quarter's 8% slump. But a 10% increase in the enterprise division, which caters to larger companies, helped overall sales rise by 5% after accounting for currency-exchange swings.

In a conference call with investors, executives said that most of these customers are renewing their contracts at slightly higher annual rates, and that's partly due to a wider range of services available today, including phone, chat, and contact-center functions. "Investing in innovation will remain a top priority for Zoom," management said.

Good earnings news

The news was even better with its finances. Zoom kept a lid on expenses in the second quarter, which helped operating income jump to $178 million from $122 million a year ago. Net income rose to $182 million from $46 million.

Its cash-flow trends pointed to even stronger growth ahead for this software-as-a-service business. Second-quarter operating cash flow jumped 31% to $336 million.

These wins are allowing Zoom to continue investing in big priorities like research and development. Integrating AI into more parts of the platform, for example, is raising its value for customers. Advancements in this area will support higher market share and profitability over time.

The stock is (relatively) cheap

Zoom's stock valuation reflects Wall Street's currently low expectations about short-term growth. After all, the company is only projected to boost sales by about 2% this year, to $4.5 billion.

As a result, you can own the stock for about 4.6 times annual sales, down from a price-to-sales ratio above 7 a year ago and over 100 during the peak growth days of the pandemic.

Sure, the company isn't likely to ever expand at anything approaching those pandemic rates. But Zoom appears set to achieve modestly accelerating sales growth as the online business stabilizes and the enterprise division spikes.

Its strong and improving financial position, meanwhile, limits the risk around owning this stock. Cash-flow trends should support higher earnings in 2023 and beyond while still allowing management to make aggressive investments into the platform, and likely a few more acquisitions.

Investors should consider how these positive factors weight against the potential for sluggish sales trends over the next few quarters. Zoom isn't a high-growth company today. But the stock still looks attractive if you're seeking exposure to the business-communications software niche.

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

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