Zoom Communications ZM impressed investors with its third-quarter fiscal 2025 results, beating both earnings and revenue estimates, which signal an attractive buying opportunity. (Read More: Zoom Q3 Earnings Beat, Enterprise Customers Drive Revenues)
The company reported adjusted earnings of $1.38 per share, surpassing the Zacks Consensus Estimate by 5.34% with a 7% year-over-year growth. Revenues hit $1.178 billion, surpassing expectations by 1.23% and showing a 3.6% year-over-year increase. The company has consistently outperformed earnings estimates in each of the trailing four quarters, maintaining an average surprise of 17.81%.
Shares of Zoom has seen its stock price surge 34.4% over the past six months against the broader Zacks Computer and Technology sector’s growth of 8.1%. The recent uptick in Zoom's stock price can be attributed to several factors raising questions among investors about whether now is the time to buy or hold onto existing positions. First, the company has been making strides in diversifying its product offerings beyond its core video conferencing platform. Zoom's expansion into areas such as contact centers, phone systems and AI-powered meeting assistants has begun to resonate with enterprise customers, potentially opening up new revenue streams.
6-Months Performance
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AI-Driven Innovation
The company's strategic transformation into an AI-first work platform is showing remarkable progress, with AI Companion Monthly Active Users surging 59% quarter over quarter. The introduction of AI Companion 2.0 showcases Zoom's commitment to innovation, featuring enhanced capabilities like Meeting Summary, Meeting Query and Smart Compose. Looking ahead, the company plans to release Custom AI Companion add-ons for Healthcare and Education in early 2024, demonstrating its focus on industry-specific solutions.
Enterprise Growth and Customer Retention
Enterprise segment performance has been particularly strong, with revenues growing 6% year over year and now representing 59% of total revenues. The company serves nearly 4,000 high-value customers contributing more than $100,000 in the trailing 12 months, accounting for 31% of total revenues. Customer satisfaction remains high, with the company achieving its lowest monthly churn rate of 2.7%, indicating strong retention and service quality.
Expanding Product Portfolio
Zoom's Contact Center and Workvivo segments have shown exceptional growth, with Contact Center securing its largest-ever customer deal of more than 20,000 seats. Workvivo was named Meta Platform’s META only preferred migration partner for its customers as it retires Workplace from Meta. The total number of Contact Center customers has surpassed 1,250, representing an impressive 82% year-over-year growth. This expansion into adjacent markets strengthens Zoom's position as a comprehensive workplace solutions provider.
Financial Strength and Shareholder Returns
The company maintains a robust financial position with approximately $7.7 billion in cash and marketable securities. In a show of confidence, the board has authorized an additional $1.2 billion share repurchase program, bringing the total unexecuted buyback to approximately $2 billion. This commitment to shareholder returns, combined with strong cash flow generation, enhances Zoom's investment appeal.
Can ZM Stock Justify Its Premium in a Competitive Market?
The company still faces significant challenges, including intense competition from tech giants like Microsoft MSFT and Cisco CSCO, which have been aggressively pushing its collaboration tools.
Moreover, Zoom's valuation remains relatively high compared to some of its peers, suggesting that much of its future growth potential may already be priced into the stock. Zoom's premium valuation is reflected in its forward 12-month price-to-sales ratio of 5.42, higher than the Zacks Internet - Software industry average of 3.03, which suggests high growth expectations but also implies elevated risk. Zoom will need to maintain its technological edge and continue delivering value to its customers to stay ahead of the curve.
ZM’s P/S F-12M Ratio Depicts Stretched Valuation
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Promising Outlook
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. Despite a mixed macroeconomic environment, Zoom's focus on operational efficiency and strategic investments positions it well for sustained growth.
While the Zacks Consensus Estimate projects 2.43% year-over-year revenue growth to $4.64 billion for fiscal 2025, earnings estimates of $5.34 per share indicate a 2.5% rise year over year.
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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
Investment Case
For investors seeking exposure to the evolving workplace technology sector, Zoom presents a compelling opportunity. The company's strong financial performance, growing enterprise customer base, expanding product portfolio and leadership in AI-driven solutions create a solid foundation for long-term growth. With its strategic focus on innovation, robust balance sheet, and commitment to shareholder returns, Zoom appears well-positioned to capitalize on the ongoing digital transformation of workplace communication and collaboration. ZM currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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