Fading Hybrid Demand Will Diminish Margins Amid Fierce Competition

Key Takeaways

• Eroding demand, feature commoditization, and tough competition from larger ecosystems threaten Zoom's revenue growth, margins, and ability to penetrate the enterprise segment.
  
• Heightened regulatory risks and shrinking differentiation drive up costs and undermine Zoom's pricing power, pressuring operating margins and overall profitability.
  
• Rapid AI integration, product diversification, and international expansion are strengthening customer engagement and market share while underpinning sustainable growth through improved operational efficiency and financial discipline.

Catalysts

Provides an Artificial Intelligence-first work platform for human connection in the Americas, the Asia Pacific, Europe, the Middle East, and Africa.

• As hybrid work becomes the permanent norm, business reliance on fully virtual communication wanes, which could erode demand for Zoom's core video conferencing solutions and stifle long-term revenue growth even as the company expands its collaboration suite.
  
• The increasing commoditization of communications platforms is likely to compress margins and accelerate customer churn for Zoom, as feature parity and aggressive pricing among competitors threaten both revenue growth and profitability.
  
• Difficulty in penetrating the enterprise upmarket due to strong incumbent ecosystems like Microsoft Teams and Google Workspace will likely restrain Zoom's ability to accelerate revenue growth from large customers and could keep net dollar expansion rates stagnant or declining.
  
• Rising compliance and cybersecurity risks from global data sovereignty laws and geopolitical fragmentation may force Zoom to increase operational and regulatory spending, squeezing operating margins and dampening future earnings growth.
  
• As unified communication and AI integration become standard among larger competitors with broader SaaS ecosystems, Zoom's differentiation is diluted, making it harder to sustain premium pricing or justify its current valuation-likely resulting in pressured ARPU and future net margins.

Zoom Communications Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Zoom Communications compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Zoom Communications's revenue will grow by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 25.0% today to 15.0% in 3 years time.
• The bearish analysts expect earnings to reach $768.2 million (and earnings per share of $2.51) by about August 2028, down from $1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 32.4x on those 2028 earnings, up from 20.8x today. This future PE is lower than the current PE for the US Software industry at 35.0x.
• Analysts expect the number of shares outstanding to decline by 1.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

Zoom Communications Future Earnings Per Share Growth

Risks

• The accelerating adoption and integration of AI-driven features across Zoom's collaboration suite-including AI Companion, Contact Center Elite, and Virtual Agent 2.0-are creating significant new value for customers, expanding use cases, and leading to both increased customer engagement and premium product uptake, which could drive higher revenues and improved gross margins over the long term.
  
• Diversification into high-growth offerings such as Zoom Phone, Contact Center, and Workvivo is rapidly expanding Zoom's addressable market, proven by strong double-digit growth rates, upmarket traction, and rising deal sizes with enterprise customers, suggesting increased customer retention and more predictable recurring earnings that could support sustainable revenue growth.
  
• The company's ability to displace legacy and cloud-based competitors in large contact center deals, along with recognized leadership in unified communications, indicates strategic momentum in capturing share in the consolidating collaboration software industry, which could help Zoom maintain or grow revenue even as competition intensifies.
  
• Robust international expansion and strong performance across Americas, EMEA, and APAC, combined with increasing channel partnerships (such as with PwC and AWS Marketplace), provide diversified demand drivers and global growth opportunities that can support revenue stability and reduce reliance on any single geography or customer segment.
  
• Continued focus on financial discipline, operational efficiency, and durable free cash flow generation-evidenced by best-in-class operating margins near or above 40 percent and year-over-year increases in both operating and free cash flow-gives Zoom flexibility to invest in strategic initiatives while also supporting share buybacks and potential earnings per share growth.

Valuation

• The assumed bearish price target for Zoom Communications is $69.26, which represents two standard deviations below the consensus price target of $91.15. This valuation is based on what can be assumed as the expectations of Zoom Communications's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $115.0, and the most bearish reporting a price target of just $65.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.1 billion, earnings will come to $768.2 million, and it would be trading on a PE ratio of 32.4x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $82.47, the bearish analyst price target of $69.26 is 19.1% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.