Could Zoom Video Communications Become the Next Microsoft?

Zoom Video Communications (ZM 2.86%) has taken investors on a wild ride since its initial public offering (IPO). The video conferencing company went public at $36 on April 18, 2019, and its stock soared to its all-time high of $568.34 on Oct. 19, 2020.

But today, Zoom’s stock trades at $70 — so a $1,000 investment would have grown to nearly $15,800 before shrinking back to just over $1,900. The bulls initially rushed to Zoom as its growth accelerated throughout the pandemic, but they hastily retreated as it lost momentum in a post-pandemic market and rising rates popped its bubbly valuations.

Image source: Zoom.

Nevertheless, Zoom’s stock has still nearly doubled in just under five years. It’s also expanding its platform with new products and services to evolve into a more diversified cloud-based communications company. So, could Zoom keep growing over the next few decades and become the tech sector’s next Microsoft?

How fast is Zoom growing?

Zoom’s revenue surged 326% in fiscal 2021 (which ended in January 2021) as more people used its video conferencing platform for online classes, remote work, and staying in touch with friends and family throughout the pandemic. Its revenue rose another 55% in fiscal 2022, even as the lockdowns ended and more people returned to their schools and offices.

However, Zoom’s revenue grew just 7% in fiscal 2023 as rising rates and other macro headwinds drove companies to rein in their software spending. It expects its revenue to rise a mere 3% to $4.5 billion in fiscal 2024 as its slower growth in Europe and Asia offsets its stronger growth in North America.

From fiscal 2023 to 2026, analysts expect its revenue to increase at a compound annual growth rate (CAGR) of only 3.5% as it continues to face macro headwinds and intense competition from similar cloud-based video conferencing and collaboration platforms, like Cisco Systems‘ Webex, Microsoft’s Teams, and Alphabet‘s Google Meet.

Zoom doesn’t look like the next Microsoft yet

Based on its current growth trajectory, Zoom doesn’t look like it will become the “next Microsoft” anytime soon. When Microsoft generated $4.65 billion in revenue back in fiscal 1994 (which ended in June 1994), it grew 24% from the previous year. It subsequently grew its revenue at a CAGR of 14% over the following 29 years.

To match that impressive growth rate, Zoom will need to make a few major acquisitions to remain a leader in the global video conferencing market, which Fortune Business Insights estimates could still grow at a CAGR of 12% from 2023 to 2030.

Zoom tried to buy the cloud-based contact center company Five9 for $14.7 billion back in 2021, but that deal eventually fell apart. Five9 reportedly rejected a second buyout offer from Zoom in late 2023. Those bids suggest Zoom is desperate to inorganically expand its ecosystem to lock in its customers and widen its moat.

The global cloud contact center market could grow at a CAGR of 26% from 2024 to 2029, according to Mordor Intelligence. So, acquiring Five9 could have given Zoom a foothold in a higher-growth market and expanded its reach among enterprise customers. Even if Zoom never buys Five9, it could still acquire smaller players or expand its own Zoom Contact Center — which is currently used to handle intra-office and customer calls.

Zoom’s ecosystem is still evolving

On its own, Zoom continues to expand its ecosystem with new AI-powered features, like Zoom Scheduler, which schedules meetings with people outside of an organization; Intelligent Director, which uses AI-powered cameras to capture the clearest angles during a video call; and its Zoom Virtual Agent chatbot for customer support services.

It’s also targeting enterprise customers with its Zoom Phone for audio calls and text messages; Zoom Rooms, which mixes on-site and remote attendees; and Zoom IQ platform for video-based sales team calls. All those services could diversify its business and boost its average revenues per customer.

Zoom has also been gradually testing ads to monetize its free users. If it ramps up those efforts, it could generate a new stream of high-margin ad revenues to complement its core stream of subscription-based revenues. It could also bundle its video conferencing and advertising plans for its enterprise customers.

Too early to say if Zoom can grow into a tech giant

With an enterprise value of $15 billion, Zoom is still a tiny company compared to Microsoft, which is worth $2.8 trillion. For Zoom to join Microsoft’s weight class in the distant future, it will need to buy more companies, expand with more cloud-based communications tools, and add more enterprise services to its ecosystem. It might even need to launch its own cloud infrastructure platform to eliminate its dependence on Amazon Web Services (AWS), Microsoft Azure, and Google Cloud and set a firmer bedrock for its own software services.

But that’s all speculation for now. Instead of wondering whether Zoom will ever become “the next Microsoft,” investors should see whether it can make some smart acquisitions, accelerate its top-line growth again, and prove it isn’t just a pandemic-era growth stock.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Cisco Systems, Five9, Microsoft, and Zoom Video Communications. The Motley Fool has a disclosure policy.

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