Has Zoom Video’s Stock Reached its Peak Growth Potential?

Zoom Video Communications (ZM 0.95%) posted its latest earnings report on May 20. For the first quarter of fiscal 2025 (ended on April 30), the video conferencing software provider’s revenue rose 3% year over year to $1.14 billion and exceeded analysts’ estimates by $10 million. Its adjusted earnings increased 16% to $1.35 per share and cleared the consensus forecast by $0.16.

Those headline numbers seemed stable, but Zoom’s stock barely budged and remains nearly 90% below its all-time high from October 2020. So will Zoom’s growth ever accelerate again, or has it already reached its peak growth potential?

Image source: Zoom.

Why did Zoom’s growth slow down?

Zoom’s growth accelerated throughout the pandemic as more people used its platform to attend online classes, work remotely, and stay in touch with their friends and family. It became synonymous with video calls because it had a catchier brand and a simpler interface than many of its enterprise-oriented competitors.

Zoom operates a freemium model that provides larger and longer meetings, cloud-based storage, and AI-driven apps for its paid users. In fiscal 2021, which ended in January 2021, its revenue and adjusted EPS soared 326% and 854%, respectively. In fiscal 2022, its revenue and adjusted EPS surged another 55% and 52%, respectively, even as the pandemic passed.

Zoom tried to buy the cloud-based contact center Five9 to expand its ecosystem and boost its revenue, but that deal collapsed in September 2021. Meanwhile, bigger tech companies like Microsoft, Alphabet‘s Google, and Cisco Systems expanded their own video conferencing platforms. Rising interest rates and other macro headwinds also forced many companies to rein in their cloud-based spending.

As a result, Zoom’s revenue only rose 3% in fiscal 2024. However, its layoffs and aggressive cost-cutting measures boosted its adjusted EPS by 19%. It also authorized a new $1.5 billion buyback plan at the end of fiscal 2024, and it bought back $150 million in shares throughout the first quarter of fiscal 2025. In other words, Zoom has been focusing more on growing its EPS instead of its revenue.

Data source: Zoom. YOY = Year over year.

But for the second quarter of fiscal 2025, Zoom expects its revenue to rise just 1% year over year as its adjusted EPS earnings dip 10%. For the full year, it expects its revenue to only grow 1% as its adjusted EPS dips 4% — which missed analysts’ expectations for 2% revenue growth, but exceeded the forecast for a 6% decline in its adjusted EPS.

To attract more higher-value business customers, Zoom has been expanding its AI-powered tools (including meeting summarization, scheduling, and chatbot services), its Zoom Phone service for audio-only calls, and its cloud-based contact center. Its total number of large customers (those that contribute more than $100,000 in trailing 12-month revenue) rose 8.5% year over year to 3,883 in the first quarter, while its enterprise customers had a high net dollar-expansion rate of 99%.

However, Zoom’s total enterprise revenue (58% of its top line) only rose 5% year over year in the first quarter. It also expects its adjusted gross margin to dip from 80% in fiscal 2024 to 79% in fiscal 2025 as it expands its cloud infrastructure.

Has Zoom reached its peak growth potential?

Zoom’s hypergrowth days are over. But at 13 times forward earnings, its downside potential should be fairly limited as it focuses on gaining more enterprise customers and stabilizing its business. Zoom might seem like a decent value play, but I think it’s easy to find better-diversified tech plays with wider moats and comparable valuations.