In 2020, it seemed that Cathie Wood's stock picks couldn't miss. Her flagship Ark Innovation ETF rocketed upward by 149% for the year, turning her into a Wall Street star. Then, the bottom dropped out of the tech sector, and the fund that once seemed invulnerable plummeted, falling 77% from its peak. Wood is undeterred, however. She's been doubling down on her strategy of buying the most disruptive and innovative companies out there. She notes that previous bear markets have yielded remarkable opportunities for investors with a long-term mindset.
One stock that Wood is particularly bullish on is Zoom Video Communications (ZM -0.99%). It's the second-largest holding in the Innovation ETF, representing nearly 9% of the value of its portfolio. And Wood has put a target price of $1,500 on it by 2026, representing an upside of more than 2,000% for investors. Wood's bull case for Zoom is even more eye-catching, with a price target of $2,000 -- which would amount to a gain of 2,700%.
Can Zoom shrug off its post-reopening hangover and the current macroeconomic headwinds and hit Wood's seemingly outlandish targets? Let's step back and take a broader view.
Image source: Getty Images.
The elephant in the room
Wood and her investing team at Ark Investment Management issued their research report on Zoom in mid-2022. This was well before we understood the full extent of the economic challenges that lay ahead, but after Zoom stock had shed 70% of its value. Unfortunately, in the days since that audacious call -- which was made on June 8 -- Zoom stock has fallen another 31%.
At the time the report was issued, Ark's research suggested that Zoom Video Communications stock could achieve a compound annual growth rate of 76% over the coming four years. The stock ended 2022 at just above $31 per share, so even if it grew at that rate, it would only reach roughly $300 by 2026 -- a far cry from Wood's target. That, in and of itself, suggests that these price targets are (currently) out of reach.
Conditions have changed dramatically since the pandemic-necessitated lockdowns that fueled Zoom's early growth. Nearly all of the stay-at-home orders have been lifted, and many enterprise-level businesses are requiring workers who had been remote to return to their offices. The combination of continuing tough year-over-year comparisons and slowing demand are skewing Zoom's results -- and not in a good way.
Furthermore, much of Wood's bullish thesis relied on a large and growing population of global knowledge workers adopting hybrid or remote work models. The return-to-office trend isn't helping matters much on that front. While the trend isn't a deal-breaker, it will certainly weigh on Zoom's growth and delay its ability to reach Wood's target on her ambitious schedule.
The nuts and bolts
To put Zoom's seemingly subpar performance over the past year into context, let's dig into its recent results.
In its fiscal 2022 (which ended Jan. 31, 2022), its revenue grew 55% to $4.1 billion, while net income soared 105% to $1.38 billion. Those lockdown- and remote-work-fueled gains set the stage for extremely tough comps in the following year.
Fast-forward to January 2023, and Zoom has been suffering -- not only from the unrealistic expectations generated by its earlier growth spurt, but also from macroeconomic headwinds that have businesses broadly reining in spending. As a result, in Zoom's fiscal 2023 third quarter (which ended Oct. 31, 2022), revenue grew by just 5% year over year (7% in constant currency) to $1.1 billion. Customer growth slowed to just 14% year over year.
On the bright side, however, Zoom has continued to generate profits, though its net income tumbled 86% to $48.4 million. This is in stark contrast to many smaller technology companies that continue to generate losses with no end in sight.
The overall economic climate will continue to weigh on Zoom, making it even less likely that the stock will achieve Wood's bullish price targets. That said, there are still reasons to believe that Zoom stock is a buy.
Driving growth
Its industry-leading position is a good place to start. While estimates vary, Zoom is the leading video conferencing software by a wide margin, with 55% of the market in 2022, according to Statista. This allows Zoom to market new and expanded products in its portfolio to a massive, already-acquired audience, making each existing customer more valuable.
Among the company's recent innovations are Zoom Phone -- a cloud-based phone system for business; Zoom IQ -- which provides actionable insights for sales meetings; Zoom Rooms -- which can be used for physical videoconferencing or hybrid meetings; and Zoom Contact Center -- which is optimized for video communications. The company continues to expand the capabilities of its digital meeting software, integrating chat, email, calendar, phone, and even whiteboard functions into its platform.
This strategy is working, as evidenced by Zoom's net dollar expansion rate of 117% for its enterprise customers. Perhaps more importantly, it has 3,286 customers contributing $100,000 or more each in trailing 12-month revenue, up 31% year over year. So it's expanding its most lucrative business segment at a faster rate.
Furthermore, the global videoconferencing market was valued at $6.28 billion in 2021, but is expected to grow at a compound annual rate of 12.5% through 2030 to reach nearly $20 billion. As the market leader, Zoom is well-positioned to capture a large share of that growth.
One final note: The stock is trading near its cheapest valuation ever, with a price-to sales-ratio of roughly 4. That's not to say the share price couldn't fall further, but if Wood's forecasts are anywhere near reality, Zoom Video Communications stock could indeed soar from here.
