Shares of Zoom Video Communications(NASDAQ: ZM) have underperformed the broad market this year, down 5% while the S&P 500 has gained 22%. However, a closer look at the stock's recent trajectory indicates the company is building impressive momentum.
Zoom stock has surged around 23% since mid-August, and artificial intelligence (AI) seems to be playing a key role in its resurgence. Let's take a closer look at the AI-related prospects for Zoom and see why the growing adoption of this technology in the contact center market could become a game changer for the company.
AI could help lift Zoom's anemic growth rate
Zoom Video Communications became a household name during the pandemic with adoption of its platform skyrocketing, but its growth has been anemic for over two years now. Revenue in the fiscal 2025 second quarter (ended July 31) increased just 2.4% year over year in constant currency terms to $1.16 billion. The company has guided for full-year revenue of $4.64 billion to $4.65 billion, which would be an increase of just 2.5% from the previous year.
However, certain metrics indicate Zoom's focus on integrating generative AI capabilities into its platform could help it accelerate its growth in the future. The company launched its generative AI assistant, AI Companion, just over a year ago, and this offering has been gaining traction. CEO Eric Yuan said on the August earnings call:
Today, AI Companion enhances an employee's capabilities using generative AI to boost productivity through features like meeting summary chat compose, image generation, live translation, and enhanced features in Contact Center. As these features have grown in popularity, we are very happy to share that Zoom AI Companion is now enabled on over 1.2 million accounts.
The company has already launched a new version of this tool, known as AI Companion 2.0. The updated generative AI assistant will allow users to generate answers using prompts, provide more contextual information from data collected across different workplace tools such as Microsoft Office, Outlook, Gmail, Google Calendar, and Google Docs; create tasks from meeting summaries; and recap email threads, among other things.
Management also added that AI Companion has been enabled on more than 4 million customer accounts as of this month, more than doubling its reach since August. This could explain why Zoom's average monthly churn fell 30 basis points year over year to 2.9% in fiscal Q2, its lowest level ever.
Meanwhile, customers are spending more money on Zoom's offerings. The number of customers contributing more than $100,000 in trailing-12-month revenue increased 7% last quarter. What's more, the company's remaining performance obligations (RPO), which refer to the total value of the company's future contracts that have yet to be fulfilled, increased 8% year over year to $3.78 billion.
The faster growth in Zoom's RPO as compared to its actual revenue growth is a bullish signal for its revenue pipeline. Even better, Zoom's current RPO (which should be recognized as revenue in the next 12 months) increased 10% year over year to $2.23 billion.
As a result, Zoom may end the fiscal year with stronger-than-expected revenue. More importantly, the lower customer churn and higher customer spending have led to a sharp increase in Zoom's profit margins in the past year, which should pave the way for robust growth in its earnings going forward.
Data by YCharts.
An attractive valuation despite the recent rally
Zoom is currently trading at 25 times trailing earnings, while its forward earnings multiple of just 13 signals strong growth on the company's bottom line too. Given the healthy pace at which Zoom's profit margin is improving, it wouldn't be surprising to see the company's bottom line beat consensus estimates going forward.
In fact, Zoom's earnings have exceeded Wall Street's estimates by significant margins in the past four quarters with its fiscal Q2 result beating the analyst consensus by nearly 15%. Analysts have been raising their earnings forecasts for Zoom throughout the year.
Data by YCharts.
With AI weaving its way into every industry, Zoom is effectively leveraging the technology to increase the appeal of its platform. This is helping the company build a solid revenue pipeline that should pave the way for stronger growth in the future.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Zoom Video Communications. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
