Although the S&P 500 has gained 18% year to date, many high-growth software and technology stocks have taken a tumble over the past few months. One of these stocks is Vimeo (VMEO 0.43%), a recent spinoff from the media conglomerate InterActiveCorp that sells video software solutions to individuals and businesses. Shares are down around 40% from its spinoff price in May, even after putting up another strong earnings report.
Is it time to buy the dip on Vimeo stock?
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Great Q2 numbers, with a July slowdown
Building off of the momentum from the work-from-home boom, Vimeo's video subscriptions continue to gain traction. Revenue grew 43% year over year to $96 million in the quarter. This came from a 17% growth in subscribers to 1.62 million and an 18% growth in average revenue per user (ARPU) to 18%. Vimeo's gross margin saw strong expansion in Q2, growing from 66% last year to 73% this year. This led gross profit to grow faster than revenue in the period, up 58% year over year.
Vimeo's stock dropped after the report, and one reason for that may have been the numbers it gave for July (the month after the end of Q2). Revenue growth in the period decelerated to 35% and slowed down in the last four months. This is not detrimental to Vimeo, and is a normal path for a company that is scaling its revenue base, but investors are still not happy to see revenue growth trending in the wrong direction. However, these numbers are still in line with Vimeo's five-year target of 30%+ annual revenue growth.
Growth in enterprise customers
Vimeo's biggest push right now is selling its products to enterprises, which it just launched two years ago. Enterprise revenue grew 80% year over year in the quarter, and the company signed big contracts with companies like Ralph Lauren, Expedia, and AT&T. The company also launched new products for enterprise customers, including Vimeo Library, a centralized hub for company videos with searchability, automatic transcription, and customizable permissions.
On the conference call, management mentioned that over 250 enterprises have started using Vimeo Library since its launch in June. It also launched automatic video recordings with Zoom Video Communications that can integrate into these employee libraries. Lastly, it has a new screen recording product called Vimeo Record, which can be useful for employee training and tutorials, especially when operating remotely. It is still early days for Vimeo's enterprise offerings, but if it can keep putting up 80% sales growth, the segment will become a bigger part of the overall business every quarter.
Long-term growth targets
On its investor day before the spinoff, Vimeo management laid out its financial goals over the next five years. Its main target is 30%+ annual revenue growth, which it hopes can come equally from subscriber growth and ARPU growth. It also thinks it can get to 75% gross margin, which it got close to achieving this quarter.
Now, investors shouldn't think 30% revenue growth is guaranteed, but if Vimeo can compound sales at 30% over the next five years, it will hit around $1.28 billion in annual revenue. With a 75% gross margin, that would be $960 million in annual gross profit. Those are a lot of assumptions, but if it can translate those gross margins into high levels of profits and cash flow, Vimeo's market cap of $5.3 billion could look cheap five-plus years from now.
Should you buy the dip?
Even after the sharp drop in share price, Vimeo stock still trades at a healthy price-to-sales ratio (P/S) of 15.4 when looking at its trailing-12-month revenue. This expensive valuation could work out fine in the long run if you believe Vimeo can meet or exceed its sales growth target of 30%. However, it looks like there is a lot of future growth already priced into the stock. Therefore, it's still probably smart to stay away from this stock -- at least for now -- if you're not confident in Vimeo's ability to grow sales from here.
