Zoom Video ZM shares lost approximately 8% on Tuesday following the company's fourth-quarter fiscal 2025 earnings report, primarily due to underwhelming revenue guidance for the coming quarters. 

While the company beat the Zacks Consensus Estimate for revenues and earnings for the reported quarter, its forward-looking projections have raised concerns about growth prospects as more companies require employees to return to physical offices.

Shares of Zoom have seen its stock gain 8.9% in the past year compared with the broader Zacks Computer and Technology sector’s growth of 18.3%.

1-Year ZM Stock Price Performance

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ZM Q4 Performance Shows Resilience Amid Changing Work Dynamics

Zoom reported fourth-quarter revenues of $1.184 billion, exceeding the consensus mark by 0.5% and representing a 3.29% year-over-year increase, highlighting the company's strategic pivot toward artificial intelligence capabilities.

When adjusted for foreign currency impact, constant currency revenues reached $1.188 billion, up 3.6% compared to the same period last year. The company's adjusted earnings per share came in at $1.41, beating the Zacks Consensus Estimate by 7.63%, though slightly down 0.7% year over year.

Enterprise revenues, which now constitute 60% of Zoom's total revenues (up 2 percentage points year over year), grew approximately 6% compared to the same quarter last year. The company's trailing 12-month Net Dollar Expansion rate for Enterprise customers remained steady at 98%, suggesting stable retention among its larger clients.

ZM Guidance Falls Short of Market Expectations

Despite the solid fourth-quarter performance, Zoom's forward guidance disappointed investors. For the first quarter of fiscal 2026, the company expects revenues between $1.162 billion and $1.167 billion, down from the $1.174 billion anticipated earlier. Similarly, full-year fiscal 2026 revenues are expected in the range of $4.785-$4.795 billion, down from the previous guidance of $4.798 billion.

This weaker-than-expected outlook reflects ongoing challenges as organizations increasingly mandate in-office work, potentially reducing reliance on remote collaboration tools. However, Zoom's management remains confident in its AI-driven strategy, with Yuan stating, "As Zoom AI Companion becomes increasingly agentic, we look forward to continuing to help our customers fully realize the benefits of AI and discover what's possible with AI agents."

The Zacks Consensus Estimate for fiscal 2026 indicates 2.73% year-over-year revenue growth to $4.79 billion. The consensus estimate for earnings is pegged at $5.29 per share, suggesting a 4.51% decline year over year.

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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.

Financial Strength of ZM Despite Growth Concerns

Despite the slowing growth, Zoom continues to demonstrate financial strength. Operating cash flow for the fourth quarter increased 20.9% year over year to $424.6 million, while free cash flow grew 25.1% to $416.2 million. The company maintains a robust balance sheet with approximately $7.8 billion in cash, cash equivalents, and marketable securities.

Zoom actively returned capital to shareholders, repurchasing approximately 4.3 million shares in the fourth quarter and 15.9 million shares during the fiscal year. The company ended the quarter with operating cash flow and free cash flow margins of 35.9% and 35.2%, respectively, demonstrating efficient capital management despite competitive pressures.

ZM Stock Valuation and Competition 

With a forward 12-month price-to-sales ratio of 4.74, Zoom trades at a significant premium compared to the Zacks Internet - Software industry average of 4.64. This premium valuation reflects investors' expectations for future AI-driven growth, but also creates downside risk if the company's strategic initiatives fail to accelerate revenue growth in the coming quarters. The current valuation appears to price in the successful execution of Zoom's AI strategy rather than reflect the near-term growth challenges.

ZM’s P/S Ratio Depicts Stretched Valuation

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Competitive pressure remains a critical concern for Zoom investors. The company faces formidable rivals in Microsoft MSFT with Teams, Cisco CSCO with Webex, and Alphabet GOOGL-owned Google with Meet, all of which have embedded their collaboration tools within broader productivity suites. These tech giants possess significant resources to invest in AI and can leverage existing enterprise relationships and bundled offerings to compete on price.

While Zoom has built strong brand recognition, its standalone position requires continuous innovation and differentiation to maintain market share against these integrated competitors who can offer collaboration tools as part of larger enterprise contracts.

Strategic Focus on AI and Enterprise Solutions

Zoom is doubling down on its AI capabilities, with monthly active users of Zoom AI Companion growing 68% quarter over quarter. The company plans to launch a Custom AI Companion add-on in April to automate workplace tasks through custom agents, allowing personalization to fit customer needs and seamless integration with third-party tools.

Additionally, Zoom's Contact Center solution achieved its largest annual recurring revenue deal in history with a Fortune 100 U.S. tech company, demonstrating the company's ability to compete in the enterprise space.

What Should Investors Do With ZM Stock?

For existing shareholders, holding the stock may be prudent given Zoom's strong cash position, ongoing share repurchases, and strategic investments in AI that could eventually reignite growth. The company's expanding portfolio beyond meetings into phone, team chat, and contact center solutions creates multiple avenues for potential future expansion.

For prospective investors, however, waiting for a better entry point during fiscal 2026 seems wise. The company's near-term growth challenges and ongoing transition to an AI-first platform may create volatility, potentially offering more attractive valuations in the coming quarters as Zoom works to prove the effectiveness of its strategic initiatives in driving sustainable growth. Zoom Video currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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