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Is Zoom Video A Buy Amid Artificial Intelligence Software Race?

With the coronavirus emergency long over, the clock is ticking on Zoom Video Communications (ZM). A rebound in revenue growth for Zoom stock depends on its success in the corporate market. And the outlook for ZM stock is tied to whether the company morphs into a broader business communications platform.

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Zoom Video reported January-quarter earnings and revenue that topped estimates and announced a $1.5 billion buyback of its own shares.

Also, the company had $7 billion on its balance sheet as of Jan. 31. There's speculation it could make a sizable acquisition.

In 2024, ZM stock has retreated 8%. On Feb. 1, Zoom Video said it will cut 2% of its workforce, about 150 jobs. In 2023, it eliminated 15% of its workforce.

With an end-of-year rally, Zoom stock advanced 6% in 2023. The Nasdaq composite shot up 43% amid buzz over generative artificial intelligence technology. The S&P 500 rose 24%.

Zoom Stock: AI Battleground

Rather than increase revenue, Zoom Video expects gen AI tools to retain and add customers.

At its annual Zoomtopia user conference in early October, the company said it will not charge customers for use of its AI Companion. Its capabilities include meeting/chat summaries and smart recordings.

Zoom Video is racing to build more artificial intelligence tools into its business communications platform. Zoom Video recently backed off from a change in its terms of service for platform users that would have enabled it to gather data to train AI models.

Set for release in 2024, Docs is an AI-powered workspace that can be used for documentation, project tracking and management tasks.

Meanwhile, recently told its employees to report to its offices on a more regular basis. Amid Covid-19 emergency, demand for Zoom videoconferencing software surged as businesses told employees to work from home.

Also, Zoom morphed into a social phenomenon as making video calls became routine for consumers to keep in touch with family and friends. Remote learning and needs in telemedicine also boosted demand for Zoom Video's cloud-based services.

ZM Stock: Microsoft Competition

Sales growth slowed for the ninth-straight quarter as the company adjusts to slower product demand in the post-coronavirus emergency era. Analysts have debated when decelerating sales will hit a bottom.

Zoom's cloud-based software sets up video calls, with chat tools available. Also, customers can easily share content.

Microsoft (MSFT) and its Teams communications tools are Zoom's major rival in the business market. Microsoft is upgrading its products with technology from startup OpenAI.

Zoom Video aims to integrate AI into more products. At the Enterprise Connect conference in March, Zoom Video announced the expansion of a workplace collaboration platform. Called Zoom IQ, it summarizes chat threads, organizes ideas, drafts content for chats, emails, and whiteboard sessions and creates meeting agendas.

In May, Zoom announced an investment in AI startup Anthropic to support research roadmaps. Anthropic's AI model will be integrated into Zoom's Contact Center platform.

Zoom Video in July rolled out Zoom Workforce Management, which improves agent productivity by automating/optimizing agent work shifts and monitoring agent performance.

ZM Stock: Strong Balance Sheet

Zoom Video in early March said company President Greg Tomb, a former cloud computing executive at Alphabet's (GOOGL) Google, will leave.

Zoom Video on Feb. 7 said it will cut 1,300 jobs, or about 15% of its workforce.

As the coronavirus crisis eases, retaining small businesses as well as corporate accounts will be one key to Zoom's success. For customers with one to 10 employees, renewals are expected to slow as the economy reopens and shelter-in-place orders lift. There's expected to be less turnover of larger customers.

In the business market, Zoom rivals include RingCentral (RNG), Cisco Systems (CSCO), Google and others. Growth in annual recurring revenue for business customers with contracts topping $100,000 is one metric to monitor.

In July 2021, Zoom Video and Five9 (FIVN), which automates call center services, announced a deal to merge. The all-stock deal was originally valued at $14.7 billion. But the companies terminated the agreement on Sept. 30.

Zoom Video aims to be a player in the contact center market with its own products and services.

Zoom Stock: Customer Retention Key

One key to Zoom's success has been a "freemium" business model. Zoom's basic video-calling package is free.

Zoom puts limits on the number of participants in a group call and the length of meetings. Zoom software gets high ratings for ease of use and simplicity following earlier video services that provided jerky images and out-of-sync audio.

A "Zoom Meeting" refers to a videoconferencing session hosted on its cloud infrastructure. Paid Zoom business plans cost $15 or $20 per employee and require minimums of 10 or 50 seats.

It's not clear how much some new product initiatives are contributing to growth.

Zoom Phone, a cloud-calling product rolled out in 2019, lets customers set up group internet phone calls without video. The Zoom Phone replaces traditional business PBX phone systems.

The Zoom IPO in April 2019 raised $752 million, with shares priced at 36. ZM stock popped 72% on the first day of trading.

ZM stock peaked at 588.84 in October 2020. Zoom stock ended 2020 up more than 400%, but them promptly retreated 45% in 2021.

In 2022, ZM stock tumbled 63% as revenue growth slowed.

ZM Stock: Fundamental Analysis

Eric Yuan, Zoom's chief executive and founder, came to the U.S. in 1997. He started out with WebEx Communications and eventually became its vice president of engineering.

Cisco acquired WebEx for $3.2 billion in 2007. Yuan then became Cisco's corporate vice president of engineering for collaboration software. He later formed San Jose, Calif.-based Zoom Video in 2011.

Zoom Video has built up alliances with the likes of Salesforce.com (CRM), Atlassian (TEAM) and Box (BOX). Salesforce.com invested in Zoom stock prior to its initial public offering and reaped big gains.

Also, Zoom Video has forged new deals in the enterprise market, such as one with software maker ServiceNow (NOW).

Zoom Q4 Earnings Report

Zoom earnings for the quarter ending Jan. 31 were 1.42 per share on an adjusted basis, up 16% from a year earlier. Revenue rose 2.6% to $1.146 billion.

Zoom stock analysts had projected earnings of $1.15 a share on sales of $1.13 billion.

In the enterprise market for business customers, revenue rose 5% to $667.3 million, topping estimates of $658 million.

For fiscal 2025, Zoom said it expects earnings of $4.86 per share at the midpoint of its outlook vs. estimates of $4.66 per share. The company said it expects revenue of roughly $4.6 billion vs. estimates of $4.637 billion.

Zoom Stock: Is It A Buy Right Now?

Shares currently have an IBD Relative Strength Rating of 24 out of a best-possible 99.

Further, Zoom stock holds an IBD Composite Rating of 71 out of 99. The best growth stocks have a Composite Rating of 90 or better.

ZM stock holds an Accumulation/Distribution Rating of B-minus. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading. Its current rating indicates more funds are buying than selling.

As of March 25, Zoom stock traded well below an entry point of 71.30.

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.

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