Cathie Wood is the chief investment officer at Ark Invest, an asset management company that runs thematic index funds focused on disruptive technologies like artificial intelligence. Wood and her team currently manage a $13.5 billion portfolio, 3.1% of which is invested in Zoom Video Communications (ZM 1.11%).
Ark published a valuation model for Zoom in 2022 that outlined three possible trajectories the stock could follow through 2026. The base-case scenario, or the most optimistic plausible trajectory, posited a per-share price of $1,500, which now implies about 2,170% from the current price of $66 per share in the next two years. The odds of that happening, I think, are virtually zero, but Zoom still warrants closer consideration.
Here's what investors should know.
NASDAQ: ZM
Key Data Points
Zoom's growth continued to slow last year, but reacceleration is possible
Zoom shares jumped on better-than-expected financial results in the fourth quarter, though growth continued to slow throughout fiscal 2024 (ended Jan. 31, 2024). Full-year revenue rose 3.1% to $4.5 billion, down from 7% growth one year ago and 55% two years ago. However, non-GAAP net income jumped 19% to $5.21 per diluted share due to disciplined expense management.
The investment thesis for Zoom centers on its ability to simplify communications. The company is best known as the market leader in videoconferencing software (Zoom Meetings), but its platform also includes phone system, contact center, and team chat applications. Businesses can often reduce cost and complexity by consolidating their communications tools through a single vendor.
Zoom also has monetization opportunities with adjacent artificial intelligence (AI) products. Specifically, its portfolio includes virtual agent technology that automates customer service interactions in Zoom Contact Center, and conversational intelligence software that analyzes interactions in Zoom Meetings and Zoom Phone to improve sales team productivity.
Currently, the company makes most of its money through Zoom Meetings. But Zoom Phone surpassed 10% of total revenue in the first quarter of fiscal 2024, and Zoom Contact Center will probably reach that milestone in the not-to-distant future given that licenses increased nearly threefold over the past year. Add-on AI solutions could also become a meaningful revenue stream as core communications products see greater adoption.
On that note, Zoom recently debuted generative AI software that can summarize conversations, draft messages, and answer questions on meeting content, among other functions. CFO Kelly Steckelberg, on the fourth-quarter earnings call, said, "Zoom AI Companion has grown tremendously in just five months, with over 510,000 accounts enabled." The product is currently free, but Zoom could monetize it in the future.
In short, Zoom once again reported sluggish revenue growth in fiscal 2024, and management expects that trend to continue next year, as guidance implies 1.6% revenue growth in fiscal 2025. However, Zoom is well positioned to drive adoption of adjacent communications and AI products given its leadership position in videoconferencing software, so revenue growth could accelerate in the future, especially in a more favorable economic environment.
Zoom stock could be a hidden gem at its current price
Ark Invest's valuation model for Zoom builds on the idea that adoption of core communications software and adjacent AI products could push sales to $52 billion in 2026. Even if we apply that figure to fiscal year 2027, most of which will take place during calendar year 2026, that forecast implies annual revenue growth of 125%. That is beyond the realm of possibility.
Wall Street has a more dour outlook. Analysts expect Zoom to grow revenue at 3.9% annually over the next five years. That estimate aligns with the sluggish growth we've seen in recent quarters, but it also leaves room for upside depending on how successful the company is with newer products like Zoom Phone, Zoom Contact Center, and add-on AI software.
With that in mind, the stock currently trades at 4.5 times sales, near its all-time low of 4 times sales. That valuation is a bit pricey if Wall Street is correct in its expectations. But should revenue grow more quickly -- say, 10% annually over the next five years -- the current valuation would be a bargain in hindsight.
So, investors who think Zoom could meaningfully top the Wall Street consensus should consider buying a small position in this stock today, provided they understand that the odds of a 2,170% return by 2026 are essentially zero.
