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Customer Churn Concerns Loom Over Zoom, Street Cautious

Zoom Video Communications (ZM) has continued to benefit from the remote-working and learning environment, as observed from its second-quarter fiscal 2022 results.

Increased enterprise customers was also a positive. Smooth deployment, user-friendly interface, easy management, and scalability continue to drive the popularity of Zoom’s software.

Zoom’s new product roster includes unique meetings and webinar products that can meaningfully contribute to the expansion of enterprise customers, and enhance its competitive position.

However, a tepid fiscal third-quarter outlook is a dampener. Moreover, competition from Microsoft (MSFT) and Cisco (CSCO) in the video-communication space seems to be weighing heavily on the company. I hold a neutral stance on the company. (See Zoom stock charts on TipRanks)

Nonetheless, the Zoomtopia event that was held over September 13 and 14 brought several compelling products and features to the market, including a fully equipped Zoom Rooms product and an expansion of Zoom Events, both of which aim to address larger-scale conferences. These products and features are expected to increase Zoom’s total addressable market (TAM).

A concerning trend can be observed in the company’s small business customers, who brought about 36% of total revenues in the fiscal second quarter. The attrition rate among customers with 1-10 employees looks high.

Kelly Steckelberg, Zoom CFO, noted that around 25% of subscribers are new small businesses (with less than 10 employees), who may bring the risk of higher churn.

Recently, Needham analyst Ryan Koontz analyzed the developments of the company and assessed its prospects, believing that higher customer churn from these smaller businesses may continue into the calendar year 2022 (C22), hanging heavy on top-line growth.

“We fear increased churn at the low end of the market could become a headwind before new Events and Platform sales reach scale,” he explained.

Moreover, higher operating expenses due to increased investments in growth-driving products and initiatives are expected to keep operating margins under pressure in the coming months.

However, Koontz is positive about the steady progress in enterprise channel development. Also, the new products are likely to spend C22 gaining market validation, before gaining scale in C23 onward.

These observations led Koontz to maintain a Hold rating on the stock. Moreover, the analyst did not set a price target for the company.

Wall Street seems to resonate with Koontz’s cautiously optimistic stance, with a Moderate Buy consensus rating of Zoom, based on 10 Buys and eight Holds. The average Zoom price target of $375.85 indicates upside potential of 33.1%.

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Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.

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