Stock Watch: Is Zoom Video Communications (ZM) a good buy after earnings?

Zoom Video Communications (NASDAQ: ZM), the online meeting platform that was little known in the pre-COVID era, became a leading player in digital communication after widespread movement restrictions triggered a shift from traditional meetings to videoconferencing. Currently, it is one of the top platforms for web conferencing, but the recent slowdown in business has raised speculation that the pandemic-driven boom is probably waning.   

Stock Dips

Zoom’s dismal performance in the stock market underscores those concerns. The stock suffered a setback this week after the market reacted harshly to weak second-quarter earnings and the management’s cautious guidance. Extending the downtrend, ZM closed the last trading session sharply lower. But the current weakness is unlikely to last long since its causes are temporary in nature.

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Read management/analysts’ comments on quarterly reports

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After the steady fall, the stock seems to have bottomed out and is poised to bounce back in the latter part of the second half. If market watchers’ positive outlook is any indication — with the average target price indicating a double-digit gain — it is an investment worth trying.

That said, there are concerns that the impact of macroeconomic issues on small- and medium-sized businesses, which account for a major share of Zoom’s revenues, would reflect on its business in the near term. But the main challenge facing the company would be rising competition from the likes of Google Meet and Microsoft Corporation’s (NASDAQ: MSFT) Teams.

Strong Demand

The good news is that the demand for remote meeting services keeps growing, creating enough space for all players to grow. The present slowdown will ease as market conditions improve, enabling the company to regain its lost strength. Moreover, the management is not taking any chance on its growth goals and is investing heavily in the business with a focus on product development and innovation. Recently- launched products, Zoom Contact Center and Zoom IQ for Sales, should help attract users to the platform.

From Zoom Video’s Q2 2023 earnings conference call:

“We have implemented initiatives focused on driving new Online subscriptions, which have shown early promise, but were not enough to overcome the macro dynamics in the quarter. We believe Zoom remains well-positioned in this environment as customers look to increase productivity and collaboration while moving away from expensive legacy vendors. Our products are designed to drive efficiency and cost savings within organizations and are loved by both their employees and their customers.”

Financial Performance

Since the pandemic-linked demand boom is mostly over, sales have returned to the normalized cycle that is expected to persist. So, a deterioration from the current levels is unlikely. In the July quarter, revenue growth slowed to single digits and the top line slightly missed experts’ estimates, while the number of enterprise customers increased 18% to about 204,100.

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Adjusted profit declined 23% year-over-year to $1.05 per share, but exceeded expectations maintaining the long-term trend. Anticipating the weakness to extend into the final months of 2022, the company reduced its full-year revenue guidance.

Zoom’s shares are currently trading at the lowest level in more than two years, with the weak earnings report adding to the slump. The stock entered 2022 on a low note and the value more than halved since then.