There was a lot of excitement when InterActiveCorp (IAC -2.18%) announced that Vimeo (VMEO -0.71%) would be spun out as its own publicly traded company last year. The video software and management platform was growing like gangbusters during the pandemic, and investors wanted in on the action. This led Vimeo's stock to be valued at a price-to-sales ratio (P/S) of 25 when it made its public debut in June 2021. However, since then, it has been all downhill for Vimeo shareholders, with the share price steadily bleeding out over the past 12 months. As of this writing, shares are down 89.6% from all-time highs set near the IPO.
Here's what went wrong with Vimeo, why the stock is down 90% over the last 12 months, and whether investors should consider buying shares today.
Image source: Getty Images.
Slowing revenue growth, poor margins, and tech sell-off
Vimeo is a video software-as-a-service (SaaS) platform where individuals, small businesses, and enterprises can manage all their internal and external video needs. These capabilities got a demand boost during the pandemic, leading to solid financial growth for the business. In June of 2021, when Vimeo became publicly traded, it was growing revenue by 41% year over year. This was driven by a combination of 17% subscriber growth and 19% average revenue per user (ARPU) growth.
However, since then, Vimeo's revenue growth has greatly decelerated. In May of this year, revenue only grew 16% year over year, a huge change from just a year ago. This likely has investors spooked about Vimeo's ability to grow over the next three to five years and is why they have continued to sell off the stock. On top of this growth deceleration, Vimeo's margins have gone downhill. A year ago, the company's operating margin was negative 9% and looked to be on a trajectory to hit positive operating profits. But now, the operating margin is at negative 20% and moving in the wrong direction. Vimeo management has said this is because of a ramp-up in hiring across product development and sales teams, but investors are not liking the mounting losses.
Lastly, we can't count out the broad sell-off in software and technology stocks this year. The Nasdaq-100 index is down 28% year to date, which definitely had an impact on Vimeo's share price. Combine all these factors, and it isn't so shocking that Vimeo's stock is down 90% since its public debut. Perhaps more astounding, the stock's price-to-sales (P/S) ratio has gone from over 25 to under 2.5 in less than a year.
VMEO Operating Margin (TTM) data by YCharts.
Business still looks healthy (somewhat)
Deteriorating margins are never a good look, but there are a few green shoots that indicate Vimeo's business is still in a somewhat healthy place. First, even though revenue growth is slowing down, it is still growing at a double-digit clip. This indicates that Vimeo's video tools were not just needed during the pandemic and are continuing to get adoption among individuals and businesses around the world. Second, gross margins are marching higher, at 75% in the first quarter vs. 72% a year ago. While operating losses are still high, this shows that Vimeo has strong unit economics and should get solid operating leverage if it can continue growing the top line.
Most importantly, Vimeo is still seeing strong traction from its enterprise/salesforce side of the business. It now has 8,000 of these sales-assisted customers, making up 30% of revenue and growing faster than its overall revenue. With lower churn and higher contract values, these customers are much more valuable for Vimeo over the long term and should help improve financial health over time.
The big thing investors need to watch is cash burn. Vimeo had a negative $26.7 million in operating cash flow last quarter, and while a lot of this was from working capital changes, it puts the company on a $100 million annual burn rate. With $291 million in cash on the balance sheet, this isn't a huge concern, but it needs to be fixed within a few years. Otherwise, management is going to have to raise money from the capital markets.
Should you buy shares today?
It is clear why Vimeo's stock has been down big in the last 12 months. But for long-term investors, this could provide a buying opportunity with shares trading on the cheap. At a P/S ratio of below 2.5, Vimeo does not need to obtain much operating leverage or revenue growth to provide shareholders with solid returns this decade. For example, if it can grow revenue at 15% a year for the next five years and reach a 10% profit margin, the stock will be trading at a price-to-earnings ratio of 13 based on today's share price. This is well below the market average.
To me, this makes Vimeo an interesting opportunity for investors willing to take on riskier positions in their portfolios.
