Microsoft (MSFT) is integrating AI features at the speed of a nimble startup despite being one of the oldest tech companies on the planet. Last week the company announced Microsoft 365 Copilot, an implementation of ChatGPT into popular business apps like Excel, PowerPoint, Outlook and Teams.
Copilot is going to allow business users a number of features, but many are directly going to impact Zoom Video’s (NASDAQ:ZM) ability to grow in the future.
In order for AI to actually be a game changer, the dataset it pulls from has to be relevant to the user. In this case, nothing is more relevant to a business than its emails, calendars, and data contained inside company documents. In the future, Microsoft will have the leverage to link to CRM systems and customer records for even more functionality.
This type of functionality is going to pose issues for Zoom Video. Enterprises closely tied to Microsoft’s ecosystem will naturally find a fit with Copilot, therefore capping some of Zoom’s growth potential.
The real issue for Zoom is that operating expenses are already expanding at a faster rate than revenue – and having Microsoft unveiling revolutionary new features is going to cause Zoom to continue to spend just in order to keep up.
Revenue in the most recent quarter was up just 4.3%. The real issue is research and development expense was up 123%. That led to a 69% increase in operating expenses on a quarterly basis and 53% increase for the full year.
That spun Zoom Video from solidly profitable to a negative operating income of $129.9M in Q4 and obliterated operating income for the full year, down from over $1B in 2022 to under $250M in 2023.
The bull case argument is over $1.2B of these costs are stock based compensation (up from $477M last year) which leads to cash flow that’s similar to last year. However I don’t know many investors that can argue a 7% Y/Y revenue increase coupled with a 169% increase in stock based compensation is a good thing for shareholders.
For the upcoming year, Zoom Video is guiding to $4.435B and $4.455B or essentially no growth on the revenue side.
Looking out a few more quarters and it’s not impressive with low single-digit growth anticipated for the next few years.
On the profit side, the company is actually projected to see negative growth in 2024, followed by mediocre growth in the following years to come.
Some investors are going to argue Zoom isn’t overly expensive from a valuation perspective trading at 16.48x 2024 earnings and 4.57x 2024 sales.
Sure, Zoom Video isn’t wildly overvalued. But you rarely get a premium multiple on Wall Street with single-digit growth rates and competitors like Microsoft pouring billions of dollars into a product that at worst is comparable and at best a game changer.
The real bad news for Zoom Video is Microsoft isn’t the only competitor knocking at the door. Last week Google (GOOG) (GOOGL) unveiled a similar suite of products for docs, gmail, and Meet/Chat that dilutes the enterprise collaboration market even further.
The combination of Microsoft and Google quickly upgrading the enterprise collaboration software stack is going to cause Zoom to go toe-to-toe with not one, but two gigantic R&D spenders. Combine that with essentially flat revenue growth and it will keep Zoom Video’s valuation in a penalty box for an extended period of time.
Combine all this with return to office trends and the fact remote workers tend to be laid off first and Zoom’s market opportunity is shrinking. This is reflected by the stagnated revenue growth the company is projecting.
Zoom isn’t going to expand its multiple with slow revenue growth. Worse yet, Microsoft and Google are knocking at the door with a dataset that’s closer to the customer. AI is going to disrupt many businesses over the next decade and Zoom video is going to struggle to compete.