Zoom's Earnings Triumph Masks Near-Term Risks: Why the Sell Signal Holds Water

The paradox of Zoom Communications (ZM) is stark: it just delivered a fourth consecutive earnings beat, yet its near-term prospects have deteriorated to the point of earning a Zacks Rank #4 (Sell). While investors might applaud its short-term performance, a deeper dive into earnings revisions, customer retention trends, and sector dynamics reveals a cautionary tale. Here’s why the sell rating—despite the earnings surprise—isn’t just noise but a critical red flag for investors.

The Earnings Beat: A Pyrrhic Victory

Zoom’s Q1 results were unequivocally strong. It reported EPS of $1.43, a 10% surprise over the $1.30 consensus, while revenue hit $1.17 billion, narrowly exceeding estimates. This outperformance, coupled with its year-to-date stock gain of 1.8% versus the S&P 500’s 1%, suggests resilience in a slowing software market. Yet, the Zacks Rank system—a forward-looking tool tracking earnings estimate revisions—has downgraded ZM to a #4 (Sell). Why? Because analysts are aggressively revising future earnings estimates downward, eroding the stock’s near-term outlook.

The Disconnect: Earnings Surprises vs. Earnings Revisions

The Zacks Rank prioritizes trends in analyst expectations over absolute performance. While Zoom’s Q1 beat was impressive, the subsequent wave of downward revisions—driven by slowing revenue growth and intensifying competition—has outweighed the positive news. This is a classic case of “buy the rumor, sell the news”: investors are rewarding past performance but pricing in future underdelivery.

The key metric here is revenue growth deceleration. Zoom’s ARR (annual recurring revenue) grew just 3.3% year-on-year in Q4, down from pandemic-era highs and well below software sector benchmarks. Even its improved net revenue retention rate (NRR) to 102% in Q4, up from 98% in Q3, masks deeper issues.

Sustainability of the 98% NRR: A Glass Half Empty

Zoom’s net revenue retention rate (NRR)—a measure of its ability to retain and grow revenue from existing customers—has averaged around 100% over the past year. While this stability is better than feared, it’s far from the 120%+ NRR seen by top-tier SaaS firms like Snowflake or Veeva.

Breaking it down:
- Enterprise customers: While Zoom added 4,088 clients paying over $100K annually (up 93 from Q3), its Enterprise net dollar expansion rate remained at 98%. This implies existing large accounts are not significantly upgrading their services—a red flag in a market where customers increasingly scrutinize SaaS spending.
- Online segment: The Online average monthly churn dropped to 2.8% (down 40bps year-on-year), a positive sign. However, the percentage of MRR from customers with 16+ months of service (74.2%) hints at a reliance on older accounts rather than new, high-growth cohorts.

The elephant in the room? Competition. Microsoft Teams, Google Meet, and Cisco Webex are eroding Zoom’s dominance. Its NRR stagnation reflects this reality: customers are holding back on spending amid better, cheaper alternatives.

Industry Dynamics: A Strong Sector, a Struggling Stock

Zoom operates in the Internet-Software sector, which Zacks ranks in the top 26% of all industries—a group that historically outperforms. Yet, this tailwind isn’t enough to offset Zoom’s internal challenges.

Consider peer Samsara (IOT), which is set to report on June 5 with 25.2% YoY revenue growth and a 0.06 EPS estimate. Samsara’s focus on IoT and logistics software has it on a trajectory of high single-digit revenue growth, contrasting with Zoom’s anemic 3-4% growth. This divergence underscores a sector-wide shift: investors are favoring companies with clear innovation pipelines and defensible moats—qualities Zoom is struggling to maintain.

The Bottom Line: Sell Signal Stands

Zoom’s Q1 beat is a testament to its operational execution, but the Zacks Rank #4 isn’t arbitrary. The data paints a clear picture:
- Earnings revisions are sinking: Analysts are lowering estimates due to slowing growth and competitive pressures.
- NRR is stabilizing but not excelling: A 102% rate is a bump, not a breakthrough, in a sector that demands higher retention.
- Sector strength isn’t enough: While the software space is robust, Zoom’s inability to outpace peers like Samsara limits its upside.

For investors, the calculus is straightforward: near-term risks outweigh short-term gains. Unless Zoom can reverse its downward earnings revisions trend—a feat requiring aggressive innovation or pricing power—it’s prudent to heed the Sell signal.

Final Call: Zoom’s stock is a cautionary tale of outperformance in the rearview mirror. While its platform remains ubiquitous, the writing is on the wall: without a catalyst to reignite growth, the Zacks Rank #4 isn’t just a warning—it’s a verdict. Proceed with caution.