Custom AI Companion May Boost Productivity But Faces Adoption Uncertainties

Key Takeaways

• Zoom's shift to an AI-first platform and agentic AI capabilities could enhance customer productivity and create new revenue opportunities.
  
• Strategic partnerships and enterprise market focus aim to expand user base and enterprise growth, improving revenue and margins.
  
• Increased competition and macroeconomic challenges may hinder Zoom's ability to sustain margin improvements and revenue growth.

Catalysts

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

• Zoom’s transformation into an “AI-first” work platform, especially with the introduction of advanced agentic AI capabilities, could drive future revenue growth by enhancing customer productivity and creating new monetization opportunities through the Custom AI Companion add-on.
  
• Strong growth and momentum in Zoom Phone and Contact Center, with a focus on the enterprise market and large deals, particularly the 15,000-agent deal with a Fortune 100 company, suggest potential for revenue expansion in the enterprise segment.
  
• Zoom’s partnership and integration with major platforms like AWS, along with strategic partnerships like Meta Workplace migration to Workvivo, could bolster user base expansion and engagement, leading to higher revenue and enterprise growth.
  
• The federated AI approach leveraging specialized small language models in addition to large models aims to improve quality and cost efficiency, likely enhancing net margins by managing AI-related costs and improving the cost structure.
  
• The ongoing stock repurchase program and a focus on operating cost efficiencies while balancing investments in AI and growth products are expected to contribute positively to earnings per share (EPS) growth.

Zoom Communications Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zoom Communications's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.7% today to 19.6% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being $1.0 billion (with an earnings per share of $3.1). However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $684.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.4x on those 2028 earnings, up from 23.0x today. This future PE is greater than the current PE for the US Software industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 0.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.37%, as per the Simply Wall St company report.

Zoom Communications Future Earnings Per Share Growth

Risks

• Zoom's overall revenue growth is relatively modest, with FY '26 guidance at approximately 2.7% year-over-year, which could impact future revenue expectations if growth doesn't accelerate significantly.
  
• Despite innovations and strategic shifts, increased competition and macroeconomic challenges may hinder Zoom's ability to sustain margin improvements or revenue growth, thereby affecting net margins.
  
• The success of AI initiatives and new product introductions appears uncertain, relying heavily on ongoing customer adoption and market acceptance, which could impact revenue growth if these initiatives do not materialize as anticipated.
  
• Continued reliance on strategic partnerships and large-scale enterprise deals, if not successfully executed, may lead to fluctuations in earnings and revenue.
  
• Free cash flow conversion is expected to be lower due to factors such as timing differences and changing interest rate conditions, which might constrain net margins and cash flow growth.

Valuation

• The analysts have a consensus price target of $91.142 for Zoom Communications based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $70.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.1 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 33.4x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $75.98, the analyst price target of $91.14 is 16.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.