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Investment Thesis
Post Q1, Zoom (NASDAQ:ZM) has been relatively flat due to what the market sees as weak guidance. However, I think this is the wrong move. Based on what I see from their current. AI advancements, I believe the company is clearly executing well on its AI-driven acceleration plan.
Zoom's new AI technologies, including AI Companion, are designed to increase productivity through features like meeting summaries, transcription, smart scheduling, and support for 38 languages. With this technology, users will be able to save time and streamline workflow, making Zoom an indispensable tool for businesses. The introduction of Zoom Workplace, which integrates various communication tools, further enhances collaboration and reduces operational silos.
The recent OpenAI event further boosts my confidence in Zoom's future. OpenAI's real-time voice translation model can eliminate language barriers, facilitating ease of use. International communication. This technology is very important, as it is over. 64% Executives acknowledged that language barriers have hindered international business deals. The integration of this technology gives Zoom an opportunity to expand its appeal to multinational corporations, increasing adoption and use of the platform.
I believe that with this translation technology, if Zoom is able to successfully implement it into their Zoom calls, there is incredible upside potential. Even on its own, the stock looks cheap from a valuation perspective. So, I recommend the Zoom as a strong buy.
Why am I doing follow-up coverage?
Earlier in March, I covered Zoom saying that I believe Zoom has strong potential due to their AI development, particularly their AR/VR technology. Since that coverage, Zoom has underperformed the market. The market has seen an increase of about 3.85 percent, while Zoom's stock value has declined by about 6.22 percent.
Zoom stock performance (Searching for Alpha)
Despite the decline in their stock price, I believe we will see the integration of new AI technologies, especially those developed by OpenAI that increase their performance (already announced features between) will help accelerate the stock. With that said, I think it's important to have follow-up coverage to analyze what their future looks like and to show what I believe to be a scenario where the market zooms in on AI capabilities. And mispricing strong growth potential.
Income results
Zoom reported its FY1 2025 earnings after the bell on the 20th (Monday). During their earnings call, they demonstrated solid financial performance and significant advancements in their AI technology. Zoom reported total revenue of $1.14 billion, up 3% year-over-year, topping the high end of their guidance by nearly $16 million (and beating estimates by $13.71 million). Non-GAAP income from operations increased 8% year-over-year to $457 million, which translates to a 40% non-GAAP operating margin for the quarter. EPS estimate of $1.35/share is higher than $0.16/share.
Zoom's focus on AI was highlighted prominently during the earnings call. CEO Eric Yuan opened the call on the topic of AI by saying:
Our rapid innovation over the years has taken us far beyond video conferencing. Every step is guided by our mission to solve customer problems and enable greater productivity. In the process, we've very deliberately built a communication and collaboration powerhouse with AI built natively into the platform – Q1's earnings call.
He then went on to reveal how, as a company, they have been recognized for this innovation:
From time to time we are recognized as a leader by Gartner, G2, Trust Radius and many others. And we're thrilled that in March, Fast Company included Zoom in its prestigious list of the world's most innovative companies for the 2024 -Q1 2025 earnings call.
CFO Kelly Steckelberg added:
Zoom AI Companion has grown significantly in just eight months with over 700,000 active customer accounts as of today's Q1 call.
I think this is a great estate. AI is spreading across enterprises and Zoom is riding this trend. I think this will lead nicely to where I think they can go with AI real-time audio translation features.
Zoom Workplace was also a key topic on the call, as Yuan described the technology's features:
Within the launch of Zoom Workplace are new enhancements and capabilities such as multi-speaker view, document collaboration, AI-powered portrait lighting, as well as upcoming features and products like Ask AI Companion, which help employees get the most out of their work. Will work across the platform to do this. Their time-to-workplace launch extends Zoom Phone, Team Chat, Events and Whiteboard with more AI companion capabilities – Q1 2025 earnings call.
Expanding on the capabilities of this program, he said:
Zoom Workplace is also designed to increase employee engagement through WorkView's integration into our platform. In Q1, we landed a large telecom customer on Workvivo, which bought about 100,000 sets – the Q1 earnings call.
I think with strong AI adoption in Q1, it's clear that the company is successfully leveraging AI and helping businesses make it easier to use AI for their video calls (and (with continued use cases providing why Zoom is helpful in the workplace (more employees in the office are returning to work).
With that comes what I think could be the next phase asymmetry (the company is valued less without it but I think it could speed things up). I believe the introduction of real-time AI translation will be a key differentiator. This technology enhances the user's voices to speak fluently in other languages, effectively eliminating language barriers and facilitating seamless international communication. This feature is especially important for multinational corporations and can play a significant role in the adoption of Zoom's platform.
OpenAI's new features offer disproportionate upside.
OpenAI's recent announcement of GPT 4o, capable of real-time voice translation, marks a significant technological breakthrough. This model can improve the user's voice and effectively eliminate language barriers, almost anyone can speak in completely different languages ​​without delay in real time. This capability is critical for many businesses that face communication challenges in their global operations.
I believe the demand for such products will prove substantial, considering that an estimated 64% of executives say they experience delays in international business deals due to language barriers and misunderstandings. Have to do. Real-time voice translation can solve this problem by allowing firms to communicate seamlessly in different languages, thereby opening up new opportunities for outsourcing and improving operational efficiency.
Zoom is well positioned to take advantage of this technology, and I think it will be huge. By integrating OpenAI's voice translation model, Zoom can expand its platform's capabilities, making it more attractive to multinational corporations.
For reference, Zoom already works with OpenAI to power other AI features the company has. I believe real-time translation can significantly expand Zoom's use cases. Companies looking to communicate in the future where language barriers are an issue will need to use widely recognized video and audio conferencing platforms like Zoom. I believe it makes the product much stickier.
Keep in mind that Zoom already offers AI speech to text real-time translation services in its video calls to address language barriers. This is not quite the same (however) as real-time audio translation. OpenAI's new model can help them with that.
Value
When looking at Zoom's valuation metrics, I believe the market is severely undervaluing them even without including the asymmetric aspect of what AI translation can bring. On top of that, with Zoom's recent selloff due to weak guidance, it's apparent that the market has little confidence in future growth prospects where they hold their current forward P/E ratio. I think based on recent developments, this is incredibly misleading.
As of now, Zoom trades well below the sector median. Zoom's P/E Non-GAAP (FWD) is 12.45, which is 47.94% below the sector median of 23.91. The market is valuing Zoom at a much lower company than average, but I think it deserves to trade at a higher ratio. While I believe this company outperforms the sector median by taking a conservative path, if Zoom were to trade at the sector median they would have an upside potential of around 92%.
Looking at other metrics, Zoom again falls below the sector median on most fronts. As I mentioned above, I think the market is underestimating Zoom's potential, and the integration of these new AI features will be promising, opening the door to huge growth opportunities.
How does this compare to my previous estimates?
Earlier, I argued that 75% of Zoom was up based on converging on the sector median. Since then, the stock has moved lower and the sector median P/E appears to have widened the spread. I believe this company should be valued at (or above) the sector median. With this, the upside potential is increased.
The dangers of theses
Despite the opportunity for Zoom to integrate OpenAI technology into its platform, there are still a few factors that raise my concerns.
A key risk is the possibility of account cancellations, especially from small businesses that are reducing their reliance on video conferencing tools as pandemic restrictions ease.
Additionally, there have been signs of slowing enterprise growth, which could affect Zoom's revenue stream and overall market share.
I believe this growth (and small business growth) can be backed up with the introduction of new features, most notably the groundbreaking Zoom calls and real-time translation.
I believe the introduction of real-time audio AI translation features and other AI-powered innovations can mitigate these risks by opening up new growth opportunities. Real-time voice translation can make Zoom even more essential for global organizations by removing language barriers and facilitating seamless international communication. As a company that already dominates the video calling market in the corporate world, I think the addition of this technology will be huge.
The bottom line
Despite the market's reaction to Zoom and their perceived weak guidance, I strongly believe this selloff is unnecessary. Zoom's current advancements and ability to add new features, especially in AI, suggest a promising future for development.
The introduction of AI technologies like AI Companion, which includes features like meeting summaries, transcription, smart scheduling, and support for 38 languages, is poised to increase productivity and streamline workflow. On top of that, the launch of Zoom Workplace, which integrates various communication tools, further enhances collaboration and reduces operational silos. Additionally, the recent OpenAI event and the development of real-time voice translation technology have the potential to break down language barriers and facilitate seamless international communication. Adding something like this to Zoom's platform would (in my opinion) be huge for the company's growth prospects.
Despite risks such as potential account cancellations, enterprise slowdowns, Zoom's innovative AI features, particularly real-time voice translation, are likely to mitigate these risks and open up new growth opportunities.
With that said, I believe the stock is a strong buy.