Zoom Shares Sink Despite Revenue Beat. Is It Time to Buy the Stock on the Dip as It Turns to AI to Drive Growth?

A pandemic darling, Zoom Communications (NASDAQ: ZM) is well past its glory days when its stock was trading above $550 back in 2020. The company saw a lot of pull forward in demand during that time, and as a result, revenue growth has been much slower in the proceeding years.

That slower growth was also evident in the company's most recent quarter. While its results topped analyst estimates, investors were still looking for more from the company. The stock price fell on news of the results and is now up about 15% on the year (as of this writing).

Let's zoom into Zoom's most recent results to see whether the company has the opportunity for a turnaround after the most recent dip in its stock price.

Looking to be an AI company

For its fiscal 2025 third quarter (ended Oct. 31), Zoom grew its revenue by nearly 4% year over year to $1.18 billion, topping the analyst consensus for revenue of $1.16 billion, as compiled by LSEG. Adjusted earnings per share (EPS) climbed 7% to $1.38, coming in ahead of the $1.31 consensus.

Zoom has been performing better with large enterprise customers, while it continues to see softness among smaller, largely online self-service customers. This continued in fiscal Q3, with the company seeing enterprise revenue jump nearly 6% year over year to $698.9 million as the number of customers with trailing annual revenue of more than $100,000 increased by 7%. Online revenue, meanwhile, was flattish at $478.7 million. Online average monthly churn was 2.7% in the quarter, which was an all-time low.

However, net dollar retention among enterprise customers was only 98%. A number under 100% means the company is seeing more churn or customers reducing spending versus expanding with the company's services.

In reaction, the company is introducing a number of artificial intelligence (AI) features. It recently unveiled its AI-first Work Platform designed to help enhance interaction and productivity through AI tools. This includes its Zoom AI Companion 2.0, an AI assistant that can perform tasks such as summarizing conversations, identifying action items, and helping compose messages.

Next year, meanwhile, the company plans to introduce Custom AI Companion add-ons for specific industries. In the first half, it will release solutions aimed at the healthcare and education verticals. It will also launch a new platform for frontline workers in the retail, healthcare, and manufacturing industries. Its new Zoom Workplace platform will be able to provide insights and shift summaries to these workers.

Some areas do appear to be doing well. One is Workvivo, the collaboration platform it bought last year. The company saw the number of Workvivo customers surge by 72% in the quarter. It is also doing well in the contact center space. The company said it signed its largest-ever contact center deal with a customer -- for 20,000 seats -- in the quarter, and its customer count grew by 82%.

One thing the company continued to do well was generate a lot of cash. It produced operating cash flow of $483.2 million in the quarter and free cash flow of $457.7 million. It ended the period with cash and marketable securities of $7.7 billion and no debt.

Looking ahead, Zoom increased its fiscal 2025 guidance to a range of $4.656 billion to $4.661 billion in revenue with adjusted EPS of between $5.41 and $5.43. That was up from a prior forecast of adjusted EPS of $5.29 and $5.32 on revenue of between $4.63 billion and $4.64 billion.

For fiscal Q4, the company guided for adjusted EPS of between $1.29 and $1.30 on revenue of $1.175 billion to $1.180 billion. Analysts were looking for adjusted EPS of $1.29 and revenue of $1.17 billion.

Image source: Getty Images.

Is it time to buy the dip?

Zoom is not exactly an expensive stock, trading a forward price-to-earnings ratio (P/E) of 15.5 next year's estimates and a forward price-to-sales ratio (P/S) -- a common metric by which software-as-a-service (SaaS) companies are valued -- of just over 5. But with about 30% of its market cap in cash, those valuation metrics are actually a bit overstated. Excluding its net cash, its P/E would be under 11, and its enterprise value-to-revenue would be about 3.6.

ZM PE Ratio (Forward 1y) data by YCharts. PE Ratio = price-to-earnings ratio. PS Ratio = price-to-sales ratio.

The issue for Zoom, though, is that tech investors are generally looking for growth, not undervalued cash-producing machines. However, given this low valuation, if the company's new AI efforts can spur growth next year, there could be a lot of potential upside ahead.

Considering this, I think investors should think about buying the stock on the dip.

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Geoffrey Seiler has positions in Zoom Communications. The Motley Fool has positions in and recommends Zoom Communications. The Motley Fool has a disclosure policy.