Zoom Growth at Risk as Economy, Competition Take Toll

Video conferencing provider Zoom Video Communications Inc. (ZM) became a household word in the early stages of the COVID-19 pandemic as its software helped people work, learn, and socialize without leaving home.

Then its stock completed one of the pandemic's costliest round trips, dropping from a record high of $559 a little more than two years ago to about $81, below where it traded in February 2020.

Zoom is expected to post adjusted earnings of 83 cents per share on Nov. 21 after the market close for the third quarter of its 2023 fiscal year, down from $1.11 a year earlier, based on the average estimate of analysts tracked by Visible Alpha, The expected year-over-year revenue increase of 4% would extend a precipitous decline in the annual growth rate after it more than tripled in late 2020 (the company's fiscal 2021).

Online video conferencing remains popular even as most workers and students have returned to the office and the classroom. Zoom's trouble is that comparable services are available from a variety of providers. Alphabet Inc. (GOOG, GOOGL), which offers Google Meet, and Microsoft Corp. (MSFT), provider of a similar service through Microsoft Teams, easily outclass Zoom in terms of financial resources, marketing muscle, and their roster of enterprise clients.

Despite that competition, Zoom's list of enterprise customers providing more than $100,000 in annual revenue is estimated to have grown by a third in a year's time. Meanwhile, the company's smaller clients may be tightening their purse strings.

“Zoom’s post-COVID recovery may continue to falter in the third quarter as tightening IT budgets and a weaker macro outlook keep [small and medium business] new customer acquisitions low and churn elevated,” Citi's analyst wrote on Nov. 16 in lowering his price target for the stock to $72 from $76, while maintaining a Sell rating.

Zoom Earnings History

Zoom shares plunged more than 16% on Aug. 23 after the company provided earnings and revenue guidance below estimates for its October-ending quarter. Analyst consensus estimates for the period now match that forecast. The company beat its July-quarter profit expectations but fell short on revenue.

First-quarter results, reported in May, generated more enthusiasm, as earnings and revenue beat expectations while the number of $100,00 or more customers fell short of estimates.

Zoom Key Stats

Source: Visible Alpha 

The Key Metric

Zoom says it focuses on customers contributing more than $100,000 of revenue over the trailing 12 months as a measure of its effectiveness in scaling its offerings and attracting large enterprise clients. Such customers are particularly valued as a relatively reliable source of steady revenue.

As of July 2022, Zoom had 3,116 $100,000 or more customers, accounting for 26% of quarterly revenue, up from 2,278 such customers providing 20% of revenue a year earlier.