Zoom Video Communications (ZM 5.57%) is a bit of a mystery as a growth stock.
Once a pandemic darling (because it facilitated video communications for millions of users forced to avoid direct contact with others), investors eventually soured on the stock as users were able to return to the offline activities they had enjoyed before COVID-19-related lockdowns. And yet the business performed solidly throughout the past few years even as the stock fell.
Zoom even initiated new growth efforts, building out an artificial intelligence (AI)-driven communications ecosystem. Then there is the endorsement of Ark Investment Management's CEO Cathie Wood, whose bold predictions regarding other tech stocks (like Tesla and Bitcoin) have come to pass. Wood and her team predicted a $1,500-per-share price target for Zoom by 2026, a 22-fold gain from current levels.
But look at the stock's price performance over the past year and it is effectively flat. What's it going to take to make this software-as-a-service (SaaS) stock a buy?
The state of Zoom
As Wood and others have stated, Zoom is much more than an online meeting platform. It is a comprehensive communications ecosystem that includes team chat platforms, online whiteboards, VoIP phone service, workspaces, email, and other services.
On the artificial intelligence front, the company has built a Zoom AI companion. This tool can help write emails, process recordings, summarize meetings, and generate whiteboard content, among other functions. Additionally, the company wants to apply generative AI to activities such as improving sales training sessions or running simulated sales meetings.
Between the AI tool and its expected growth in hybrid and remote knowledge workers, Ark Invest believes Zoom's average revenue per user (ARPU) will grow by 26% yearly.
That growth would fall to 11% under Ark's bear estimate. Still, the bear estimate calls for a $700-per-share or less stock price, amounting to more than a 10-fold gain from current levels if that price target holds.
Ark Invest has backed estimates up by taking a significant position in the media stock. Zoom makes up almost 7% of its flagship fund, the Ark Innovation ETF, making the Cathie Wood investment its fourth-largest holding. Across all Ark Invest funds, Zoom makes up around 4.5% of the company's holdings.
Is Ark Invest correct?
Admittedly, the company's results have come nowhere close to matching that expected growth. In the first nine months of 2023, revenue of $3.4 billion increased by only 3% yearly.
During that period, its net income of $339 million surged 63% higher. Still, operating income fell during that period, and much of the gain came from $114 million in "other income," which consists of income from interest, foreign currency, and marketable securities. Unfortunately for Zoom bulls, that "increase" is likely a one-time event.
The one area of modest strength is non-GAAP (adjusted) free cash flow, which increased almost 14% yearly to more than $1.1 billion in the first three quarters of 2023. That was not enough to persuade investors to buy Zoom stock, as it is up just 1% from year-ago levels.
NASDAQ: ZM
Key Data Points
Nonetheless, the pessimism appears overdone. Its forward price-to-earnings (P/E) ratio is just under 14, and the price-to-sales (P/S) ratio of less than 5 is just above all-time lows. That valuation positions the stock for a massive surge if the company can stoke a recovery in revenue growth.
Should investors buy Zoom stock?
Given the state of the company, investors should consider Zoom stock. Admittedly, investors like Ark Invest may have to adjust their expectations. With 2026 just two years away, Ark Invest's base case estimates are looking increasingly unlikely to come to pass, and it may even fall short of the $700-per-share bear case estimate. Also, 3% revenue growth will probably not inspire growth-oriented investors.
However, Zoom has rapidly turned into a value stock that returns a respectable level of free-cash-flow growth. If Zoom can start monetizing some of the AI potential Ark Invest sees, it could inspire another bull market in its stock.
