H2 2024 turns out to be a solid year for Zoom Communications (NASDAQ:ZM)as the online communications platform provider’s stock has soared around 44% since the beginning of July (as of this writing).
However, the stock price fell more than 6% in pre-market trading on November 25 following the announcement of the company’s fiscal 2025 third-quarter financial results (for the three months ended October 31). This may seem surprising given that Zoom’s results and guidance exceeded Wall Street’s expectations. The company also announced that it will be changing its name to Zoom Communications as it looks to expand its reach beyond just video and take full advantage of fast-growing technology trends such as artificial intelligence (AI).
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Let’s take a closer look at Zoom’s latest quarterly results to see why investors might actually consider buying Zoom.
Zoom reported third-quarter fiscal revenue of $1.18 billion, an increase of 3.6% year-over-year. Adjusted earnings rose nearly 7% year over year to $1.38 per share. Consensus estimates were for earnings of $1.31 per share on revenue of $1.16 billion.
Even better, Zoom raised its full-year outlook. The company now expects fiscal 2025 sales to be approximately $4.66 billion, compared to its original forecast of $4.65 billion. Non-GAAP (adjusted) earnings are now expected to be $5.42 per share, compared to previous expectations of $5.29 to $5.32 per share.
Zoom’s improved guidance can be attributed to improved customer spending on its communications platform, which is not surprising given its diversification beyond video and integration of AI into its services. For example, Zoom saw a massive 82% year-over-year increase in contact center customers to 1,250 customers last quarter.
The company introduced its contact center platform in February 2022, and the growth in the last quarter shows that demand for this solution continues to grow at an impressive pace. The good news is that this market is expected to grow at a healthy pace over the long term, allowing Zoom’s contact center business to maintain a healthy growth pace. According to some estimates, the cloud-based contact center market could grow nearly 27% annually through 2029, reaching $86 billion in annual revenue by the end of the forecast period.
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At the same time, adoption of Zoom’s AI Companion platform is also steadily increasing. Zoom reported a 59% quarter-over-quarter increase in monthly active users using AI Companion, an AI assistant aimed at improving productivity for users of its Zoom Workplace platform. AI Companion performs a variety of tasks, from summarizing emails to identifying action items, summarizing documents, and consolidating information across different apps.
The rapid adoption of this platform is not surprising. According to Grand View Research, the intelligent virtual assistant market size is expected to grow at an annual rate of 24% until 2030, reaching an annual market size of over $14 billion by the end of the forecast period.
Overall, Zoom’s expansion into further markets and integration of AI into its communications platform explains why the company saw an increase in customer spending. The number of Zoom customers who spent $100,000 or more in revenue on Zoom products in the past 12 months increased 7% in the last quarter.
At the same time, Zoom’s service has become more sticky. This is evidenced by the average monthly churn rate of 2.7% last quarter, down from 3% a year ago. This was the lowest churn rate Zoom has ever reported. Thanks to these positive developments, Zoom’s remaining performance obligations (RPO) increased 5% sequentially to $3.74 billion. RPO refers to the total amount of a company’s contracts that it expects to recognize as revenue in the future. The fact that this metric grew faster than Zoom’s overall revenue indicates that the company’s growth could accelerate in the future.
Although Zoom stock fell after the beat-and-raise quarter, the above discussion suggests better times are ahead for the company. That’s why opportunistic investors may want to consider initiating a long position in this technology stock, which currently trades at a price of 29x, compared to a 33x earnings multiple on the Nasdaq 100 Index. You might think (using this tech stock as a proxy for tech stocks).
On the other hand, Zoom’s forward earnings multiple of 16x is even more attractive, indicating healthy revenue growth. Acquiring Zoom at these multiples given that Zoom’s improved revenue pipeline and focus on fast-growing niches could help it grow faster than the market expects and drive more stock appreciation. Doing so may be a wise choice in the long run.
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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has a position in and recommends Zoom Video Communications. The Motley Fool has a disclosure policy.
1 Cheap Artificial Intelligence (AI) Stocks to Buy Before 2024 Ends was originally published by The Motley Fool.
