Zoom Video Communications ZM has emerged as one of the strongest performers with its stock rallying 36.3% in the past six months compared with the broader Zacks Computer and Technology sector’s growth of 12.3%. Despite this impressive rally, several fundamental catalysts and strategic initiatives suggest the stock has significant upside potential ahead as the company transforms into an AI-first platform for workplace collaboration.
6-Month Performance
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Strong Execution and Financial Health
The company's latest quarterly results demonstrate strong execution, with revenues growing 3.6% year over year to $1.18 billion, beating analyst estimates. More importantly, Enterprise revenues, which now comprise 59% of total revenues, grew 5.8% to $698.9 million, highlighting successful penetration into larger organizations. Zoom maintained exceptional profitability with a non-GAAP operating margin of 38.9% while generating robust free cash flow of $458 million in the third quarter of fiscal 2025.
The company's healthy balance sheet, with approximately $7.7 billion in cash and marketable securities, provides significant flexibility for strategic investments and acquisitions. The recent authorization of an additional $1.2 billion share repurchase program, bringing the total to $2 billion, reflects management's confidence in the business and commitment to shareholder returns.
AI Innovation Driving the Next Wave of Growth
Zoom's AI strategy is gaining impressive momentum with AI Companion 2.0, which saw monthly active users surge 59% quarter over quarter. The company's approach of offering basic AI features at no additional cost while introducing premium enterprise-focused capabilities demonstrates a well-thought-out monetization strategy that could drive significant revenue growth.
The upcoming launch of Custom AI Companion and AI Companion Studio in early 2025 positions Zoom to capture additional revenue through enterprise customization and industry-specific solutions. By focusing on healthcare, education and frontline worker verticals through specialized AI offerings, Zoom is substantially expanding its addressable market while creating deeper relationships with customers.
Expanding Beyond Core Platform
Zoom's expansion beyond its core meetings platform shows strong progress. The Contact Center solution reached a significant milestone by securing its largest-ever deal with more than 20,000 seats in EMEA. The total number of Contact Center customers has surpassed 1,250, representing remarkable 82% year-over-year growth and validating Zoom's enterprise-grade capabilities.
The acquisition of Workvivo is proving highly strategic, with customer count growing 72% year over year and the platform securing multiple million-dollar deals, including its largest with a Fortune 10 company. The exclusive partnership with Meta Platforms META for migrating Workplace customers to Workvivo presents a substantial growth opportunity.
Improving Fundamentals Support Long-Term Growth
Operational metrics continue to improve, with online monthly churn reaching an all-time low of 2.7%, down from 3% a year ago. The company's focus on disciplined discounting practices and longer billing terms is driving better customer retention and more predictable revenue streams. Deferred revenues grew 5% year over year to $1.38 billion, indicating healthy future revenue recognition.
The Enterprise customer base continues to expand, with 3,995 customers contributing more than $100,000 in trailing 12-month revenues, up 7.1% year over year. These high-value customers now represent 31% of total revenues, reflecting the successful execution of Zoom's upmarket strategy.
Competitive Position and Market Opportunity
While facing competition from tech giants like Microsoft MSFT and Cisco CSCO, Zoom's innovative approach and customer-centric focus differentiate it in the market. The company's strategy of offering core AI features at no additional cost while monetizing advanced enterprise capabilities creates a compelling value proposition. Its forward 12-month price-to-sales ratio of 5.08, though above the Zacks Internet - Software industry average of 3.01, reflects the market's confidence in Zoom's growth potential and technological leadership.
ZM’s P/S F-12M Ratio Depicts Stretched Valuation
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Investment Case Strengthens
Looking ahead, Zoom has raised its guidance for fiscal 2025, projecting revenues between $4.656 billion and $4.661 billion, representing approximately 2.9% year-over-year growth. The company expects to maintain an impressive operating margin of 39%, demonstrating its ability to balance growth with profitability.
The Zacks Consensus Estimate for fiscal 2025 indicates 2.87% year-over-year revenue growth to $4.66 billion. The consensus estimate for earnings is pegged at $5.43 per share, suggesting a 4.22% rise year over year.
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Several factors make Zoom an attractive investment at current levels. First, the successful transition to an AI-first platform positions Zoom to capture the growing enterprise demand for intelligent collaboration solutions. The company's innovative AI offerings and focus on vertical-specific solutions create multiple growth vectors.
Second, expansion into adjacent markets through Contact Center and Workplace solutions diversifies revenue streams while increasing customer stickiness. The strong growth in these segments demonstrates Zoom's ability to successfully expand beyond its core meetings platform. Third, Zoom's financial profile remains exceptional, with industry-leading margins, strong cash flow generation, and a robust balance sheet providing flexibility for growth investments and shareholder returns.
Finally, the stock's current valuation appears attractive relative to its growth potential and expanding market opportunity in the evolving workplace collaboration space. With continued innovation in AI, growing enterprise adoption, and expansion into adjacent markets, Zoom is well-positioned to deliver substantial shareholder value in the coming years.
Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
Conclusion
For investors looking to benefit from the ongoing digital transformation of work and the growing adoption of AI-powered collaboration tools, Zoom stock presents a compelling opportunity despite its recent rally. Zoom Video currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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