The spread of COVID-19 emptied out offices around the world. Employees at all levels worked from home and relied on enhanced cybersecurity protocols and video conferencing tools to stay productive.
One company that played a big role in the shift to remote work was Zoom Video Communications (ZM 1.57%). Unsurprisingly, Zoom experienced unparalleled demand as businesses required the ability to meet virtually. Moreover, as corporate executives touted the benefits of remote work, many started to believe that returning to the office would be optional.
As such, investors poured into Zoom stock under the assumption the company would be the ultimate staple of work-from-home conditions. One of the most bullish outlooks on Zoom comes from Ark Invest, led by CEO Cathie Wood. Ark holds positions in Zoom through its exchange-traded funds (ETFs), and analysts there believe the stock could soar about 2,100% by 2026.
Although Zoom has some interesting applications, I question Ark's long-term price target. With the stock down 88% from its all-time high, let's dig into the model Wood and her team have created, and assess just how attractive Zoom stock looks at its current valuation.
What's behind Ark's assumptions?
According to Ark's model, between 820 and 850 million workers worldwide will have a remote or hybrid environment by 2026. In a hybrid environment, workers split their time between the office and working remotely. Excluding Mainland China, Ark's research suggests anywhere between 60% and 90% of employers will adopt a remote/hybrid work environment, and Zoom will be used among 20% to 50% of this cohort.
While remote and hybrid work have no doubt become more widely used, Ark's assumptions look too bullish for me. According to research firm Gartner, 39% of global workers were part of a hybrid environment in 2023. While this was up nominally from 37% in 2022, I think even the low end of Ark's range of remote or hybrid working conditions is overly optimistic.
Where Wood's team might be more accurate is in its assumptions around market share. Zoom currently boasts a 57% market share among videoconferencing software tools worldwide, according to Statista. The next closest competitor is Microsoft Teams with a 25% market share.
Image source: Getty Images.
Competition and artificial intelligence
Given Zoom's commanding lead over the competition, the company's growth prospects may appear robust on the surface. However, Zoom has a long way to go before reaching Ark's long-term revenue target of at least $30 billion (the company generated $4.5 billion of revenue in the past 12 months).
While the company's new AI-powered tools could be a meaningful way to increase its average revenue per user (ARPU), Wood and her team may be placing too much emphasis on these products. Zoom's primary competitors include Microsoft, Alphabet, and Salesforce. These tech behemoths are actively investing in artificial intelligence (AI) in the form of new products and services, as well as acquisitions.
Microsoft kicked off the AI arms race with a multibillion-dollar investment in OpenAI, the developer behind ChatGPT. This deal was swiftly followed by Alphabet, which made its own strategic investment in OpenAI competitor Anthropic.
Microsoft and Alphabet have integrated AI throughout their respective ecosystems, aiming to help customers increase productivity by leveraging automation software across various tools, including Teams and Google Video. Lastly, following its acquisition of chat messenger Slack, Salesforce has integrated a number of new features. One of the most notable is a Zoom alternative called Huddles.
The interesting part about Microsoft and Alphabet's approaches is these AI-powered services reside in the cloud. For this reason, businesses running on Azure or Google Cloud Platform (GCP) may be inclined to use video conferencing tools from their parent companies.
Furthermore, companies that leverage Salesforce as their customer relationship management (CRM) provider may also rely on Slack for its messenger and conferencing applications. The biggest factor at play here is that each of these tech giants wants to build a one-stop shop for their users' productivity needs.
Should you invest in Zoom stock?
At the end of the day, Zoom may have a tough road ahead acquiring additional market share or maintaining its current lead. I have my doubts about Ark's projections regarding the growth of remote and hybrid work environments over the next few years. Furthermore, given the sheer size of Zoom's competition and the hefty investments they've made in AI productivity tools, it's uncertain how the company will be able to differentiate at scale.
That said, I wouldn't turn my back on Zoom stock just yet.
Data by YCharts. PS Ratio = price-to-sales ratio.
The chart above illustrates Zoom's price-to-sales (P/S) ratio benchmarked against a cohort of other software-as-a-service (SaaS) businesses. At a P/S of 4.6, Zoom has the lowest valuation among these growth stocks.
Furthermore, Zoom's forward price-to-earnings (P/E) of just 13.6 pales in comparison to its long-term average of 33.7 and even the S&P 500's forward P/E of 22.1. Investors are signaling their weak expectations for Zoom by pricing it lower than the broad market.
While Ark's 2026 price target of $1,500 per share seems unrealistic, I still see many reasons to consider Zoom for your portfolio. For now, the company has a commanding lead in the global video conferencing software market -- and it should benefit from the tailwinds AI presents as it relates to corporate IT budgets.
Although the competitive landscape is intense, Zoom stock looks historically cheap and could represent a unique opportunity to buy the dip. A prudent strategy could be to employ dollar-cost averaging while keeping a close eye on the company's progress relative to its larger competitors.
