Zoom has been treading water for the past six months, recording a small return of 3.6% while holding steady at $75.22. However, the stock is beating the S&P 500’s 5.3% decline during that period.
Is there a buying opportunity in Zoom, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Even with the strong relative performance, we're sitting this one out for now. Here are three reasons why there are better opportunities than ZM and a stock we'd rather own.
Why Is Zoom Not Exciting?
Started by Eric Yuan who once ran engineering for Cisco’s video conferencing business, Zoom (NASDAQ: ZM) offers an easy to use, cloud-based platform for video conferencing, audio conferencing and screen sharing.
1. Weak ARR Points to Soft Demand
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
Zoom’s ARR came in at $4.74 billion in Q4, and over the last four quarters, its year-on-year growth averaged 3.1%. This performance was underwhelming and suggests that increasing competition is causing challenges in securing longer-term commitments. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Zoom’s revenue to rise by 2.5%, a slight deceleration versus its 4.4% annualized growth for the past three years. This projection is underwhelming and suggests its products and services will face some demand challenges.
3. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Zoom’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 38.8% for the last 12 months will decrease to 31.5%.
Final Judgment
Zoom isn’t a terrible business, but it isn’t one of our picks. Following its recent outperformance amid a softer market environment, the stock trades at 5× forward price-to-sales (or $75.22 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere. Let us point you toward the most dominant software business in the world.
Stocks We Would Buy Instead of Zoom
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
While the crowd speculates what might happen next, we’re homing in on the companies that can succeed regardless of the political or macroeconomic environment. Put yourself in the driver’s seat and build a durable portfolio by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.
