Key Points
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The SaaS sell-off has created numerous opportunities for investors in the software space.
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This company disappointed with its 2027 outlook but is showing steady improvements year after year.
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The current valuation looks like a great opportunity for this slow and steady grower.
Software-as-a-service (SaaS) stocks have been under pressure as of late due to the growing fear that generative artificial intelligence (AI) will displace many of the most popular enterprise software providers. If a company provides even a hint that competition is negatively impacting its financial results, its stock could tumble double-digit percentage points in a single day.
Such was the case with Zoom Communications (NASDAQ: ZM), which disappointed analysts with its fourth-quarter earnings results. Non-GAAP earnings per share (EPS) came in at $1.44 last quarter, versus expectations for $1.49. What’s more, its fiscal 2027 outlook fell short of expectations by about 4.5%.
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Shares of this SaaS stock tumbled as much as 15% in the days following the earnings release last month. However, it may be an incredible opportunity for patient investors.
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How vulnerable is Zoom?
Zoom has done an excellent job standing up to its competition so far, and it’s unlikely that new AI services will dramatically impact the company’s core business. For example, Microsoft Teams has the backing of one of the world’s largest enterprise software providers. Yet Zoom continues to show steady growth among enterprise customers and even faster growth among large enterprises.
That growth in the face of competition speaks to Zoom’s network effect. Both parties need a Zoom account for the software to work. As such, the company benefits from being the primary video communication tool, creating a moat around its business.
Zoom has effectively leveraged its excellent positioning at the start of the COVID-19 pandemic to grow the business and expand its opportunities. Its products have expanded to include a cloud-based phone system, workplace productivity and management platforms, and contact-center software.
That said, the company certainly isn’t ignoring the potential for artificial intelligence to impact its business. It’s investing heavily in integrating generative-AI capabilities across its services. Its AI Companion 3.0, released last year, is able to gather insights from meetings, help plan next actions, and even complete some simple tasks for users.
Zoom’s stock is reasonably priced, given its upside potential
Zoom’s spending on AI capabilities appears to be worth it as revenue continues to rise, even though it’s weighing on earnings. But the company has plenty of cash on hand and produces substantial free cash flow every quarter.
It ended 2025 with about $7.8 billion in cash and securities on the balance sheet after generating $1.8 billion for the year. Management has effectively used its cash to buy back shares while continuing to invest in its products. It has $1 billion remaining in its current repurchase authorization.
After the post-earnings sell-off, Zoom stock trades for just 13 times management’s adjusted earnings-per-share outlook. That outlook doesn’t include the potential impact of share repurchases, so the stock’s upside is even greater. Given Zoom’s steady growth and proven resilience in the face of competition, investors should be more than willing to buy shares at the current price.
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Adam Levy has positions in Microsoft. The Motley Fool has positions in and recommends Microsoft and Zoom Communications. The Motley Fool has a disclosure policy.
