Zoom Video Communications (ZM Quick QuoteZM - Free Report) has seen its stock price surge 21.2% over the past three months against the broader Zacks Computer and Technology sector’s decline of 4.4%. This impressive rally comes after a challenging period for the video conferencing giant, which experienced a significant slowdown in growth following the pandemic-driven boom.

The recent uptick in Zoom's stock price can be attributed to several factors raising questions among investors about whether now is the time to buy or hold onto existing positions. First, the company has been making strides in diversifying its product offerings beyond its core video conferencing platform. Zoom's expansion into areas such as contact centers, phone systems and AI-powered meeting assistants has begun to resonate with enterprise customers, potentially opening up new revenue streams.

3-Month Performance

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ZM’s Innovation and Market Strength Fuel Growth Outlook

Zoom Video continues to maintain a strong market position in the video conferencing industry, providing a solid foundation for future growth. Despite increased competition, the company's reputation for user-friendly and reliable services has enabled it to retain and attract customers consistently. This established user base creates a network effect, making it challenging for competitors to displace Zoom in many organizations.

The company's impressive customer metrics underscore its market strength. In the second quarter of fiscal 2025, customers contributing over $100,000 in trailing 12-month revenues grew 7% to 3,933, accounting for 31% of total revenues, up from 29% in the previous year. This growth in high-value customers demonstrates Zoom's ability to capture and retain enterprise clients, a crucial factor for long-term success.

For fiscal 2025, Zoom expects revenues in the range of $4.63-$4.64 billion. Non-GAAP earnings per share are expected in the band of $5.29-$5.32. While the Zacks Consensus Estimate projects 2.42% year-over-year revenue growth to $4.64 billion for fiscal 2025, earnings estimates of $5.31 per share indicate 1.9% growth year over year.

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Zoom's product diversification strategy is proving effective in expanding its market reach. By broadening its offerings to include Zoom Phone, Zoom Rooms and Zoom Contact Center, the company is positioning itself as a comprehensive communications platform. This expansion not only opens new revenue streams but also increases cross-selling opportunities, potentially driving higher average revenue per user.

In the second quarter of fiscal 2025, Zoom saw amazing traction with Workvivo as it reached 69 customers with more than $100,000 in ARR, roughly doubling year over year. Workvivo was named Meta Platform’s (META Quick QuoteMETA - Free Report) only preferred migration partner for its customers as it retires Workplace from Meta. ZM witnessed additional traction in Zoom Contact Center as it surpassed 1,100 Zoom Contact Center customers, representing more than 100% year-over-year growth. This was driven by its recently launched higher pricing tiers as well as its success in larger deals. The company now has five customers with 100,000 or more Zoom Phone seats.

The company's innovation in AI-powered features, such as Zoom AI Companion, has seen significant adoption, with over 1.2 million customer accounts enabled. This commitment to cutting-edge technology enhances user experience and productivity, giving Zoom a competitive edge in the enterprise market.

Zoom's financial health remains robust, with $7.5 billion in cash, cash equivalents, and marketable securities as of July 31, 2024. This strong balance sheet provides the company with the flexibility to invest in growth initiatives, weather economic uncertainties and pursue strategic acquisitions.

The ongoing trend toward remote and hybrid work models continues to benefit Zoom, as companies adopt flexible arrangements requiring robust video conferencing and collaboration tools. This shift in work culture provides a tailwind for Zoom's services in the long term.

Can ZM Stock Justify Its Premium in a Competitive Market?

Potential investors should approach Zoom stock with caution. The company still faces significant challenges, including intense competition from tech giants like Microsoft (MSFT Quick QuoteMSFT - Free Report) and Cisco (CSCO Quick QuoteCSCO - Free Report) , who have been aggressively pushing their own collaboration tools. 

Moreover, Zoom's valuation remains relatively high compared to some of its peers, suggesting that much of its future growth potential may already be priced into the stock. Zoom's premium valuation is reflected in its forward 12-month price-to-sales ratio of 4.4, higher than the Zacks Internet - Software industry average of 2.58, which suggests high growth expectations but also implies elevated risk. Zoom will need to maintain its technological edge and continue delivering value to its customers to stay ahead of the curve.

ZM’s P/S F-12M Ratio Depicts Stretched Valuation

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Conclusion

Zoom's market dominance, product diversification, financial strength and commitment to innovation position the company well for future growth. As it continues to adapt to changing market demands and leverage its strong customer base, Zoom remains a formidable player in the evolving landscape of digital communication and collaboration tools.

While the recent stock price increase is encouraging, it's important to consider whether this momentum is sustainable. Waiting for further evidence of Zoom's ability to execute on its diversification strategy and maintain growth in a competitive market could provide a clearer picture of the stock's true value. For current shareholders, holding onto Zoom stock may be a prudent strategy. Potential buyers, however, may want to exercise patience. Zoom currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.