A few years ago, it would have been hard to imagine Zoom Video Communications (NASDAQ:ZM) as a value stock. However, after peaking in 2020, the former “stay-at-home” winner now trades at a fraction of its all-time highs.

Zoom is not alone in this trend. Many other market favorites of the COVID-19 pandemic era, such as Teladoc, Peloton, and Chegg, also trade well below their peaks and have underperformed the markets.

Despite these challenges, at current prices, Zoom stock appears to be a cheap value opportunity.

Zoom Stock: The Decline in Growth Momentum

Zoom’s financial reports reveal its struggles. While the company’s revenues surged by 88.3% in fiscal year 2020 and 325% in the following year, growth slowed to 54.4% and 7.1% in the subsequent years. In fiscal year 2024, revenue grew by only 3.1%, with a mere 2.6% increase in the fiscal fourth quarter, surpassing analysts’ low expectations.

Like other pandemic-era winners, Zoom benefited from restrictions on physical movement. However, its growth has now slowed to low single digits, with fiscal year 2023 showing a modest 1.6% growth forecast for the current fiscal year.

Despite the revenue slowdown, Zoom has shown significant improvements in profitability and cash flow. The company reported a net income of $637.5 million in fiscal year 2024, a six-fold increase over the previous year. It also generated free cash flows of $1.47 billion, up 24.1% year-over-year.

Zoom’s Valuation and Outlook

Zoom’s valuation metrics suggest it is undervalued. Its next 12 months enterprise value to EBITDA ratio is 7.42x, while its NTM PE multiple is 13.6x. The NTM free cash flow to market cap multiple is 13.7x.

Analysts expect the current fiscal year to mark the bottom in terms of growth slowdown, with a projected 4% revenue growth in fiscal year 2025. Despite a $1.5 billion share buyback, Zoom continues to seek acquisition targets for growth. The company is also expanding its AI capabilities to retain and acquire new customers.

However, Zoom faces challenges in customer retention, with its trailing 12-month net dollar expansion rate for Enterprise customers falling to 101%. Competition from Microsoft Teams is intensifying.

Wall Street analysts have a consensus rating of “Hold” for ZM stock. While ZM is no longer the growth story it was in 2020, it appears to be a compelling value play in 2024, given its low valuations and strong cash position.

Featured Image: Unsplash @ Mourizal Zativa

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