Cathie Wood's ARK Invest investment firm dazzled Wall Street with triple-digit returns for many of its exchange-traded funds (ETFs) in 2020, but many of those gains have since evaporated. The stock price of her flagship ARK Innovation ETF has plunged 74% from its high, as many growth stocks have sold off sharply in response to the uncertain macroeconomic environment.

That said, investors can still learn a lot from ARK Invest's CEO. Wood brings a long-term mindset to an industry that is often preoccupied with short-term performance. Rather than setting one-year price targets, like most analysts, Wood focuses on a five-year horizon, and she has never shied away from a bold call.

For instance, ARK has a 2026 price target of $1,500 on Zoom Video Communications (ZM 0.44%) stock. That represents a 1,828% upside from its 52-week low and a 1,764% upside from its current share price. Does Wood's bullish attitude about the long-term potential of Zoom suggest is it time to buy this growth stock?

Disrupting the communications industry

Zoom operates a cloud communications platform that brings together video, phone, and chat functionality. Its cornerstone product is Zoom Meetings, a videoconferencing application that went viral during the pandemic. But the company also provides cloud phone system Zoom Phone, conference-room system Zoom Rooms, event-management platform Zoom Events, as well as a suite of developer tools and the recently launched Zoom Contact Center.

During the pandemic, Zoom Meetings earned a reputation for simplicity and reliability, and the Zoom brand became synonymous with remote work and collaboration. That competitive edge allowed the company to gain significant market share in a relatively short time. Today, Zoom Meetings and Microsoft Teams are the top videoconferencing applications on the market, according to G2 Grid, though Zoom tends to inspire greater customer satisfaction.

Zoom's brand authority and its leadership position in videoconferencing create a great foundation for its land-and-expand growth strategy, and that strategy is starting to bear fruit. Zoom Phone hit 4 million seats in August 2022, double what it had just one year ago. That said, no product except Zoom Meetings accounts for more than 10% of revenue, though Zoom Phone is getting close.

Financially, growth has decelerated as the social impacts of the pandemic have faded. In the most recent quarter, revenue rose just 8% to $1.1 billion and free cash flow dropped 50% to $229 million. But the company is battling an uncertain macroeconomic environment, and that headwind will fade in time.

Moreover, when viewed through a two-year lens, which helps normalize for the impact of the pandemic, Zoom's financial performance still looks solid.

Metric

Q2 2021

Q2 2023

CAGR

Revenue (TTM)

$1.3 billion

$4.3 billion

79%

Free cash flow (TTM)

$705 million

$1.3 billion

35%

Data source: YCharts. TTM = trailing-12-months. CAGR = compound annual growth rates. Note: Q2 2023 ended July 31, 2022.

Chasing a massive market opportunity

Zoom puts its market opportunity at $91 billion by 2025, and the vast majority of that total comes from Zoom Meetings, Zoom Phone, and Zoom Contact Center. The growing popularity of remote and hybrid work is the driving force behind that opportunity. For instance, the number of employees who engage in remote or hybrid work will rise 70% between 2021 and 2026, according to ARK Invest. And just 25% of enterprise meetings will take place in person by 2024, down from 60% in 2021, according to research company Gartner.

Building on that, there are three other catalysts working in Zoom's favor. First, its leadership in videoconferencing should help drive adoption of adjacent products. That dynamic is already evident with Zoom Phone, but management has also noted early traction with Zoom Contact Center in the most recent earnings call

Second, customers have the opportunity to simplify operations by consolidating spend on one communications platform. Of course, Zoom is not the only option, but the company has an edge over its peers when it comes to customer satisfaction.

Third, Zoom recently launched IQ for Sales, an artificial intelligence (AI) application that analyzes interactions in Zoom Meetings to discover insights for sales teams. Innovations like that should keep the company on the cutting edge of the industry, and its expansion into AI services could drive adoption by enhancing the value of Zoom Meetings (and other products in the future).

ARK's valuation model is aggressive

As my Motley Fool colleague Jon Quast discusses in this article about the investment thesis for Zoom, ARK Invest's valuation model includes some very aggressive assumptions. So investors who expect 1,700% returns over the next few years will almost certainly be disappointed, but that doesn't mean Zoom is a bad investment.

On the contrary, with shares trading at 5.7 times sales (its cheapest valuation as a public company), now looks like a great time to buy this growth stock. Given its brand authority and strong market presence with Zoom Meetings, positive momentum with Zoom Phone, and early traction with Zoom Contact Center and IQ for Sales, Zoom has a good shot at delivering market-beating returns over the next five to 10 years.