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Zoom Video Communications Cl A(ZM-Q)

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Is It Time to Sell Zoom Video Communications Stock?

Motley Fool - Fri Sep 8, 6:30AM CDT

Three years ago when vast numbers of workers were sent home as the world began its COVID-19 social-distancing effort, Zoom Video Communications' (NASDAQ: ZM) software became a vital tool that many companies and organizations used to continue to do business. As a result, Zoom's business expanded rapidly. However, since mid-2022, it experienced little to no growth.

Zoom's fiscal 2024 second quarter was no exception -- its results were once again ho-hum. So is it time for investors to move on from Zoom, or is there more to gain from holding the stock?

Some stocks never regain their all-time highs

When stocks get hyped up because of investor sentiment but later crash when reality hits, they don't always return to their highs. Consider Cisco and Oracle, for example.

ORCL Chart

ORCL data by YCharts.

Though both are successful businesses, it took around 15 years for Oracle to return to and exceed the high it set during the tech bubble. Cisco hasn't set a new all-time high in more than two decades.

Anchoring to a prior price point is a natural but dangerous habit for investors. Zoom is down around 87% from its all-time high, and it may never return to its peak.

The bigger problem is that Zoom doesn't seem like it's doing much to get there, either.

Lackluster results

In its fiscal 2024 second quarter, which ended July 31, Zoom's revenue increased 3.6% year over year to $1.14 billion. Management expects revenue to decline quarter over quarter in fiscal Q3 to between $1.115 billion and $1.12 billion. That would amount to 1.4% year-over-year growth at the midpoint -- not a lot of momentum.

One bright spot within the report was Zoom's enterprise revenue, which rose 10% and now makes up 58% of revenue. The company also grew its list of enterprise clients by 7%, making this the key area to watch.

Zoom is also cutting expenses to boost profitability. Operating expenses fell by 1.4% during fiscal Q2, but a major addition to its balance sheet was its gain from interest. Because Zoom holds around $6 billion in cash and marketable securities, interest from its cash stockpile is a big part of Zoom's profitability. Many interest-bearing accounts now pay around 4.5% on deposits. On a $6 billion sum, that would translate to around $68 million per quarter in interest revenue. Zoom reported interest revenue of $68.4 million, so this checks out.

So if you're looking for a reason to invest in Zoom, its cash hoard is about the only good one I can find. But Zoom hasn't done anything productive with it either, whether paying a dividend, repurchasing shares (the small buyback it did during 2022 has already been offset by new shares being issued), or making a big-time strategic acquisition (the 2022 Solvvy acquisition was relatively minor). In fact, cash makes just over a quarter of the company's $22 billion market cap.

If you're looking at the stock from a value investment perspective, the argument for buying it holds more water. Zoom's forward price-to-earnings ratio is quite cheap, as is its price-to-sales ratio, at least for a high-margin software company.

ZM PS Ratio Chart

ZM PS Ratio data by YCharts.

But at 16 times forward earnings, I still don't want to touch it. Zoom's lack of growth and inactivity with its cash makes me question what management is doing. Although management has made a few attempts, they haven't made many moves recently. Zoom isn't Warren Buffett waiting for the right opportunity to deploy cash and make a strategic investment. It's a fallen growth company that doesn't have much upside left. There are better prospects that can be purchased for similar valuations and that have a much better chance of regaining their peaks.

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Keithen Drury has positions in Zoom Video Communications. The Motley Fool has positions in and recommends Zoom Video Communications. The Motley Fool has a disclosure policy.

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