Is Zoom’s (ZM)AI Ambition Enough to Keep It Thriving?
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AI platform plays are getting a lot of attention from financial pros these days. According to our TrackStar data, Zoom (ZM) topped search activity in communication and collaboration software stocks with 1,451 queries last month, outpacing Twilio’s (TWLO) 951 and Atlassian’s (TEAM) 561 searches. The interest comes as Zoom reported Q3 earnings that beat expectations while unveiling ambitious AI plans. But what caught Wall Street’s attention wasn’t just the numbers – it was the company’s biggest-ever Contact Center win and a 59% quarter-over-quarter surge in AI Companion users. With shares trading near $67, let’s dive into whether Zoom’s AI transformation deserves your attention. Zoom’s Business After evolving beyond its video conferencing roots, Zoom has emerged as a comprehensive enterprise communications platform serving over 220,000 business customers globally. The company’s unified platform spans video, voice, chat, and contact center solutions. Its recent push into AI aims to enhance workplace productivity through features like meeting summaries, smart compose, and conversational AI across its product suite. Zoom segments its business into the following areas:
Q3 brought strong enterprise momentum as Zoom landed its largest-ever Contact Center deal – a 20,000-seat deployment with Spain’s tax authority. The company also secured three new Workvivo customers with over $1 million in annual recurring revenue each. |
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Zoom’s AI strategy centers on democratizing access through its AI Companion, which is included at no extra cost for enterprise customers. Custom paid add-ons for healthcare, education and other verticals will launch in early 2025. The company is also expanding into the frontline worker market with a new mobile-first solution launching next year. This addresses a massive untapped opportunity in retail, healthcare, and manufacturing. Financials
Source: Stock Analysis Revenue grew 4% year-over-year to $1.18 billion in Q3, with enterprise sales up 6%. More importantly, operating margins stayed strong at 38.9% despite heavy AI investments. The company generates substantial cash, with operating cash flow of $483 million and free cash flow of $458 million in Q3. This gives Zoom plenty of room to fund both AI development and its $1.2 billion share buyback program. The balance sheet remains rock solid with $7.7 billion in cash and marketable securities against no debt. Online customer churn hit an all-time low of 2.7%, suggesting pricing power remains intact despite competition. Valuation
Source: Seeking Alpha At 15x forward earnings, Zoom trades at a significant discount to enterprise software peers. Twilio and Atlassian carry much richer multiples at 29x and 86x, respectively. Even Dropbox (DBX), with slower growth, trades at 21x forward earnings. Only NetEase (NTES) has a comparable multiple at 13x among major enterprise software players. On an EV/Sales basis, Zoom’s 3.8x multiple is in line with Dropbox but well below Atlassian’s 14.8x and even Twilio’s 3.3x despite better profitability metrics. Growth
Source: Seeking Alpha Zoom’s 2.9% revenue growth trails the peer group, with Atlassian leading at 23.3% and even Twilio managing 5.8%. However, Zoom’s forward growth is accelerating to 3.3% as AI initiatives and Contact Center gains momentum. While growth has moderated post-pandemic, new AI products and enterprise expansion provide fresh catalysts. However, execution risks remain high given Microsoft Teams’ integration advantages and established players in the contact center space. The company’s 5-year revenue CAGR of 53.7% demonstrates its historical execution, though maintaining such growth rates will be challenging in today’s competitive environment. Profitability
Source: Seeking Alpha This is where Zoom shines. Its 75.8% gross margin beats everyone except Atlassian and Dropbox. More importantly, Zoom’s 20.3% net margin and 42.1% leveraged free cash flow margin lead the peer group by wide margins. The company’s $126,847 net income per employee also tops the group, with only Dropbox coming close at $214,185. This efficiency should help fund AI investments while maintaining margins.
Our Opinion 8/10 Zoom’s AI transformation shows early promise with strong AI Companion adoption and the landmark contact center win. While competitive pressures and margin compression bear watching, the company’s fortress balance sheet, category-leading margins, and reasonable valuation relative to peers support our positive outlook. With AI tailwinds building and a clear path to accelerating growth through vertical expansion, we see Zoom as well-positioned to outperform lowered expectations. The stock deserves a core position in long-term tech portfolios. |
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Proprietary Data Insights Financial Pros’ Top Communication & Collaboration Stock Searches in the Last Month
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