With a share price of $70, Zoom Video Communications (ZM 1.57%) is down quite substantially from its peak of $568 in late 2020. The pandemic-era darling suffers from stagnating growth and a lack of platform differentiation from rivals like Microsoft Teams and Alphabet's Google Meet, which provide similar video conferencing services.
However, according to famous technology investor Cathie Wood, Zoom's fortunes could change dramatically as it embraces new opportunities. Let's explore what the future could hold for the struggling company.
What does Cathie Wood think?
Since its founding in 2014, Cathie Wood's investment management company, Ark Invest, has become a household name because of its focus on disruptive innovation, which can generate outsize returns when things go well.
Wood believes Zoom could fit Ark's aggressive, growth-focused investment strategy. And in November, the firm purchased an additional $12.6 million worth of Zoom shares to bring the value of its total position to a whopping $712 million.
Ark is hugely optimistic about Zoom's near-term potential, giving its stock a price target of $1,500 by 2026, which implies a gain exceeding $2,000 in just two years. Cathie Wood and her team believe Zoom can pull this off by dramatically increasing its average revenue per user by introducing new products and services and artificial intelligence (AI) features.
The projections look too optimistic
On the surface, Zoom certainly has a lot of ways to implement AI technology into its platform, and it has already begun rolling out features like meeting summaries, chat tools, and translations. It can also use its vast amounts of user data to train large language models (LLMs). But these efforts look unlikely to transform the company's fortunes.
For starters, Zoom's rivals can also incorporate AI. And while new features could help Zoom stay relevant in an increasingly competitive market, they won't necessarily be easy to monetize. So far, the biggest winners in the AI gold rush have been on the picks-and-shovels side of the industry (hardware companies like Nvidia), while consumer-facing software is still, generally, yet to reach its full potential.
Image source: Getty Images.
Zoom's results show lackluster near-term performance despite the new features. Third-quarter revenue rose by just 3.2% year over year to $1.14 billion. And the slow growth highlights the challenges Zoom faces from competition and a slowdown in post-pandemic work-from-home activity. The company's new AI efforts don't seem to be fixing its core problem.
Where will Zoom stock be in two years?
The good news for Zoom is that it is profitable -- generating a net income of $141.2 million in the third quarter. This means it has reached a scale where it doesn't necessarily need massive growth to survive. And it has some financial leeway to invest in new opportunities. The company also has a low valuation with a forward price-to-earnings (P/E) multiple of 15, significantly lower than the Nasdaq Composite estimate of 29.
Zoom shares are dirt cheap. And over the next two years, they may inch toward a more optimistic valuation. That said, Cathie Wood's projections look like wishful thinking. Zoom's core problems with a weak moat and heavy competition aren't going anywhere. And there are much better alternatives for investors who want to bet on artificial intelligence software. Investors should give Zoom's shares a wide berth unless something drastically changes.
