The days of post-pandemic normalization are over; Zoom Video Communications (NASDAQ: ZM) has reverted to sustainable growth. The company has sustained a low single-digit quarterly growth pace for nearly three years and is on track to maintain the pace in 2025 and beyond. The takeaway is that this positive cash flow tech company’s stock trades at a reasonable valuation in late 2024 with diminished headwinds and tailwinds building. Among the tailwinds are improving analysts' sentiment following years of downward pressure.
The analyst's response to the Q3 results is good. MarketBeat tracks 13 revisions that reverse the downward trend in place since 2022. The revisions include maintaining two above-consensus targets, an upgrade to Buy from Hold, and 11 price target increases. Only one of the revisions aligns with the consensus; the remainder is above it, implying a 5% to 25% upside for the stock from a critical support target net the 150-day EMA.
Zoom Video Communications Falls After Strong Results, Improved Guidance
Zoom Video Communication had a solid quarter but not a robust one, with revenue growing by 3.6%. However, the 3.6% is sufficient to drive a robust cash flow and sustain the healthy balance sheet while execs work on improving shareholder value. The $1.17 billion is strong relative to consensus, outpacing MarketBeat’s reported consensus by nearly 100 basis points on improving client metrics. Enterprise revenue, the core business, rose by 5.8% on a 7% increase in large business and reduced churn. Quarterly churn fell to a record low, revealing a high customer satisfaction rate and the likelihood of continued growth.
The margin news is also good. The company experienced some compression but far less than anticipated, with the adjusted operating margin still strong at 38.9%. The net result is $1.38 in adjusted EPS, up 700 basis points year-over-year and 500 bps ahead of the consensus and central to the guidance increase. The company increased its guidance for revenue and earnings due to momentum and new client wins, which suggests it may be cautious. Regardless, the new guidance expects revenue and earnings in a range above consensus at the low end, leading the analysts to increase their estimates and stock price forecasts.
Zoom Video Communications Builds Value for Investors
As tepid as the growth is, Zoom Video Communications' free cash flow allows it to sustain a fortress balance sheet while investing in the future. The balance sheet highlights for Q3 include increased cash and assets only partially offset by increased liability. The net result is an 8% increase in shareholder equity and persistently low leverage. Total liability is running at less than 0.25x equity and about 1x cash, leaving the business in a robust financial condition.
The only factor unfavorable to higher share prices is institutional activity. Institutions own about 65% of the stock, so it can present a headwind for the market. Their activity has been neutral to stock prices in 2024 but is net-bearish in Q4 and may cap gains. The critical resistance point is near $95.
The Technical Outlook: ZM Stock Isn’t Zooming Anywhere Soon
The price action in Zoom is iffy. The market surged ahead of the release only to form a Shooting Star Doji and confirm it as an Abandoned Baby the day after. That is a bearish signal aligning with resistance at the $95 level but offset by strengthening support. Support is seen at another critical level, a recently broken resistance point and market pivot. The resistance break at $83 put the market at a two-year high and on track to complete a reversal. In this scenario, the market will likely trend sideways in the near term and potentially move higher in 2025. If not, Zoom Video stock could fall below the critical support target and revert to the low end of its trading range.
