Over the past six months, Zoom’s shares (currently trading at $78.50) have posted a disappointing 9.8% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Zoom, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Zoom Not Exciting?
Even with the cheaper entry price, we're cautious about Zoom. Here are three reasons why we avoid ZM and a stock we'd rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Zoom’s billings came in at $1.25 billion in Q1, and over the last four quarters, its year-on-year growth averaged 5%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Customer Churn Hurts Long-Term Outlook
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
Zoom’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 98% in Q1. This means Zoom’s revenue would’ve decreased by 2% over the last 12 months if it didn’t win any new customers.
Zoom has a weak net retention rate, signaling that some customers aren’t satisfied with its products, leading to lost contracts and revenue streams.
3. 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 3%, close to This projection is underwhelming and implies its newer products and services will not catalyze better top-line performance yet.
Final Judgment
Zoom isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 5.1× forward price-to-sales (or $78.50 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d recommend looking at the most dominant software business in the world.
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