2022 kicked Zoom while it was already down.
Zoom Video Communications stock has already been struggling with households and businesses making a return to in-person activities, but economic uncertainty is creating even more issues headed into 2023. Zoom shares are now down nearly 60% in 2022 after the last earnings update, even as the business itself continues to (slowly) expand.
Zoom's customers are clearly being impacted by macroeconomic factors, which is trickling down into key performance metrics for the company itself. Though 2023 is largely expected to be another sluggish year, pessimism is at least partially baked into the share price at this point. Is now the time to buy Zoom?
Individual and small business "churn" is back to pre-pandemic levels
One of the primary factors eating at Zoom for nearly two years now is a dwindling of its small business and individual subscriber base (now labeled as the "online" segment). This effect has offset strong growth in the "enterprise" segment, which caters to larger organizations that buy bulk wholesale access to Zoom's video and work collaboration suite.
Unfortunately, this issue continued in the fiscal 2023 third quarter (the three months ended Oct. 31). Enterprise revenue increased 20% year over year to $614 million, but "online" segment declines lowered overall revenue growth to just 5% for a total of $1.102 billion.
As other multinational companies have also been reporting, arecord run-up in the U.S. dollar(a side effect of the Federal Reserve's interest rate hikes) also took a huge bite out of Zoom's sales. A strong U.S. dollar lowers the value of a sale made overseas. So excluding the impact from negative currency exchange rates against the greenback, Zoom's revenue would have grown 7% year over year, not 5% as reported.
It wasn't all bad, though. The company did report that its online segment's monthly churn rate (the number of customers that unsubscribe from the service as a percentage of the total customer count) did fall to 3.1% -- back to a level not seen since pre-pandemic. During an investor presentation earlier this year, Zoom revealed the churn rate for its small business and individual customers has been abnormally high for two years now. It peaked at 7% in the fiscal 2021 second quarter (the summer of calendar year 2020, during economic lockdowns) and has remained above or near 4% ever since.
Churn aside, Zoom is profitable
Just as the churn rate for its small business and individual segment starts to ease, Zoom's enterprise segment (now over half of revenue) is getting negatively impacted by a weakening global economy. The U.S. dollar's impact on international sales isn't finished just yet. And big enterprise customers are thinking twice before quickly signing up for new video and work collaboration services, making it increasingly likely that Zoom is nothing more than a mid-single-digit percentage growth company once again next year.
Again, it isn't all bad. Even in this tough business environment, Zoom is still forecasting high-teens to mid-20% enterprise growth. And though that growth trajectory is nothing to get too excited about, Zoom is at least profitable. Net income was down to $208 million in the first nine months of the current fiscal year (compared to $885 million the same period last year). But free cash flow was just over $1 billion so far this year, with most of the difference between cash flow and net income being a big jump in employee stock-based compensation.
To offset dilution to existing shareholders arising from that stock-based compensation, Zoom has used nearly all of its free cash flow this year to repurchase stock ($991 million-worth at last report). The company reported having $5.17 billion in cash and short-term investments at the end of October, no debt, and an additional $355 million in long-term investments.
After the last earnings update, Zoom stock trades for 18.3 times trailing 12-month free cash flow. And Zoom trades for just 13.7 times free cash flow on anenterprise value(market cap minus cash and equivalents) basis. For now, this isn't going to be a high-growthcloud software business. But steady results and share repurchases certainly make the current price tag fair. When the company can finally get a handle on its "online" subscriber problem and the U.S. dollar stops eating into sales, Zoom might even be called "cheap."
This may not be the most exciting stock these days, but Zoom still has my interest.
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