Why Zoom Stock Tumbled 15% In April | The Motley Fool

What happened

Shares of pandemic darling Zoom Video Communications (ZM +0.49%) dropped 15.1% in April, according to data provided by S&P Global Market Intelligence, nearly doubling the S&P 500's decline. Zoom's growth is expected to slow down dramatically this year, leading the market to chip away at the stock's premium valuation.

So what

Shares of Zoom have been slumping since last summer. As it stands today, the stock is down about 75% from its all-time high. Sentiment has shifted hard as the urgency of deploying Zoom's solutions has waned, and the recent rout in growth stocks certainly isn't helping.

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Zoom's last earnings report came in February, and it painted a not-so-pretty picture. While revenue soared 55% in fiscal 2022, the company predicted just 11% growth for fiscal 2023. This growth will come at a heavy cost. Zoom sees adjusted earnings per share of $3.51 at most for the full year, down from $5.07 in fiscal 2022.

During the beginning of the pandemic, companies were forced to quickly deploy a videoconferencing solution that enabled remote work. Zoom was the path of least resistance given how easy it is to get started compared to legacy products. Zoom's solution pretty much sold itself.

That is clearly no longer the case. Smaller customers are churning at higher rates as they reassess the need for Zoom, and larger customers now have the luxury of taking their time to weigh all the options. That means longer sales cycles, higher spending on sales and marketing, and reduced profits.

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Zoom is attempting to diversify its way out of this mess. The company launched its own contact center platform in February after its deal to acquire Five9 fell through, and it's been adding collaboration features like Zoom Whiteboard to its product offerings. While these initiatives have long-term potential, it will be tough for Zoom to not be viewed as a one-trick pony by the market.

Now what

It might take a while for the late-pandemic hangover to run its course for Zoom, but the videoconferencing market will almost certainly grow in the long run as remote and hybrid work becomes more accepted as the norm. The problem for Zoom is that its valuation is still not all that attractive relative to this growth opportunity.

Zoom is valued around $31 billion, or roughly 7 times its revenue guidance for fiscal 2023. That's not high compared to the nosebleed valuations software stocks have been awarded in recent years, but two things have changed. First, Zoom is having to ramp up spending just to eke out double-digit growth this year. And second, valuations in general are coming down as inflation and interest rates rise.

If the story at Zoom over the next few years is sluggish growth and profits under pressure, further declines could be on their way for the pandemic darling.