Professional money manager Cathie Wood’s ARK Invest, known for its innovation-focused investment approach, has placed a substantial bet on Zoom Video Communications (NASDAQ: ZM). The ARK Innovation ETF, holding over $8 billion in assets, includes Zoom as its fifth-largest position, valued at nearly $600 million. Despite a recent 88% decline from its all-time high, Cathie Wood remains bullish on Zoom, projecting a target of $1,500 by 2026. Should investors consider buying into Zoom at this discounted level?
Stellar Earnings Growth Outlook: Zoom experienced significant growth during the early stages of the pandemic, with a revenue surge of 369% year over year at the end of fiscal 2021. However, as pandemic-related momentum waned, recent fiscal 2024 third-quarter revenue grew by 3.2%. This slowdown contributed to an 88% drop in Zoom’s stock value.
Despite the revenue slowdown, Zoom’s business expansion has generated substantial earnings growth through operating leverage. With over $1.3 billion in cash profits in the past year and a robust balance sheet holding $6.5 billion in cash (30% of Zoom’s market cap), analysts predict a potential 38% annual compound growth in earnings per share (EPS).
Upside Potential in Revenue Growth: Zoom has amassed a base of 219,700 enterprise customers, offering opportunities for growth through upselling new products. These products include Zoom Phone (cloud-based business telephone system), Zoom Contact Center (digital contact centers with video capability), and Zoom One (an all-in-one package of communications and collaboration tools). Early traction is evident, with Zoom Contact Center customers reaching 700, and Zoom One customers signing up for Zoom Phone increasing more than 300% year over year.
While not every enterprise customer requires these additional services, a modest conversion rate could significantly benefit Zoom’s revenue. With a 5% year-over-year increase in its enterprise customer base and a 105% net revenue retention rate, a realistic annual revenue growth of 10% or more is anticipated.
Investment Returns Potential: Investment returns hinge on a company’s growth and the valuation paid for that growth. Zoom’s current forward P/E ratio is at a significant discount of 15, considering the expected annual earnings growth of more than 37%. The PEG ratio stands at an appealing 0.40, suggesting an attractive investment opportunity.
Considering a scenario where Zoom achieves 25% annual earnings growth for the next five years, resulting in EPS of $15 per share by 2028, a P/E ratio of 25 could yield a share price of $375. This scenario implies a potential five-year return of over 400% from the current levels. Despite not reaching ARK Invest’s ambitious targets, Zoom presents a compelling investment case.
Cathie Wood’s $600 million bet on Zoom reflects confidence in the company’s future prospects. While uncertainties exist, Zoom’s discounted valuation and growth potential make it an intriguing option for investors.
Should You Invest? Before deciding to invest in Zoom Video Communications, it’s essential to consider additional factors and potential alternative investment opportunities. The Motley Fool Stock Advisor analyst team has identified what they believe are the 10 best stocks for investors to buy now, and Zoom Video Communications may not be among them. Evaluating these 10 stocks could provide insights into potential high-return opportunities in the coming years.
