Zoom Video Communications (ZM 3.49%) is a stock that took a pounding over the past year, falling 40% in value. The hype around its videoconferencing technology has slowed down, and there is more competition as well. This led to a brutal one-two punch for the business.
And while the company continues to grow (even beating expectations last quarter), there's one concerning number that investors should be paying attention to -- one that has to improve before this can become a viable investment.
Operating income was less than $10 million
Zoom's earnings for the period ending April 30 were $1.16 per share on an adjusted basis, coming in well above Wall Street estimates of $0.99. But that's on an adjusted basis. The company's operating profit was just $9.7 million -- down a staggering 95% from $187.1 million in the prior-year period.
The problem is that Zoom's sales rose by just 3% year over year to $1.1 billion, but its operating expenses jumped by 33% to $831.7 million. That's nearly as much as its gross profit of $841.4 million. The trend of rising expenses eclipsing sales growth has been an ongoing one for Zoom and presents a big problem for the business going forward.
ZM Revenue (Quarterly YoY Growth) data by YCharts
While the company did raise its earnings guidance for the year, that again is on an adjusted basis. And it has boosted its revenue guidance, but it is a minor improvement, to a range of $4.46 billion and $4.48 billion for fiscal 2024, versus a previous forecast range of $4.43 billion and $4.45 billion.
Why operating income is an important number
Operating income is one of the most important figures for investors because it comes before other income and expense items that can sometimes skew a company's final net income figure. This past quarter, for example, Zoom's other income boosted the company's earnings by more than $33 million. A year ago, other expenses resulted in additional costs totaling $43 million.
Since these income and expense items can include gains and losses from investments, there can be significant volatility from these line items, which can give investors a misleading picture of how the business is performing.
A good operating profit can be an indicator that the business is profitable and doing well. And since it comes before nonoperating items, it's closely aligned with day-to-day cash flow as well. Not only did Zoom's operating profit drop significantly last quarter, but its operating cash flow also worsened.
At $418.5 million, the company generated less cash from its operations during the quarter than it did a year ago when operating cash flow totaled $526.2 million. And that's even as it spent $73 million more on stock-based compensation, which should improve cash flow as the company is paying expenses with stock rather than cash.
Is Zoom's stock a buy?
Zoom has given back pretty well all of its gains since the pandemic, so a case can be made that it's a good buy, as the business is much bigger than it was in 2019. But, unfortunately, with revenue growth a challenge moving forward as it faces competition from Microsoft Teams and Verizon's BlueJeans also providing consumers and businesses with videoconferencing capabilities, its viability as a growth stock is questionable. And without a strong bottom line, it also doesn't make for a good value buy, either.
The end result is that investors are better off taking a wait-and-see approach with Zoom's business, as it will have to find a way to show that it can generate consistent growth or, at the very least, drastically improve its bottom line. As of now, there isn't a compelling reason to buy the tech stock, even if you're a contrarian investor, as it could be a tough road ahead for the company and its shareholders.
