Zoom Video (ZM)
- Bull/bear debate: can Zoom grow revenues in 2024?
- Executives may have M&A on their minds with $5.4 billion on their balance sheet
- Microsoft Teams is a increasing competitive threat to its core business
- Large exposure to tech and financial services customers is headwind
- Free cash flow generation is still strong at over $1.1 billion annually
The market is trying to figure what kind of company Zoom is over the next 5 years. Is it more of utility that is generating tons of free cash (over $1 billion annually) or can it reaccelerate its top line growth? In 2019, Zoom had just 330mn in revenue; in 2023, over $4 billion – so true parabolic growth in 4 years; but the company is guiding to just 1% growth in the year ahead. I don’t think there is a ton of risk with the stock trading back to its pre-COVID stock level of $70 a share and a company that generates over $1 billion in free cash flow; but if this company can find profitable growth, Zoom stock has tremendous upside.
Following its recent 15% company wide layoffs and firing of its President, Zoom is going through a transition period while also trying to manage macro/competition impacting its exciting customer net retention and new customer adoption. With the President laid off, this shifted CEO Eric Yuan’s focus from R&D/product development into sales and growth.
Last year, Zoom bought back over $1 billion in stock; but there was no further authorization for 2024. This leaves some risk in the stock as management has stated interest in M&A with over $5.4 billion in cash on the balance sheet. The positive is that a potential acquisition wouldn’t be at peak multiples but the risk is about integration and how it fits into its product suite. Zoom has made small acquisitions (Solvvy and Workvivo) in the past year but can they make the right deal to re-accelerate top line growth in a meaningful way. That is the big risk and opportunity.
AI has been headline grabbing in 2023. Keep in mind that Zoom bought Solvvy, a leading conversational AI and automation platform for customer support. This is being integrated into their contact center product where businesses will benefit from an automated, integrated, and easy to deploy contact center, which will help answer end-customers questions and solve issues faster. It doubled its ARR from 3Q to 4Q in contact center, albeit still a small number overall.
Are you bullish or bearish on Zoom Video?