For many investors, Zoom Video Communication (NASDAQ: ZM) is a pandemic trade that has long since lost its appeal. But Cathie Wood’s Ark Invest published a valuation model in 2022 that estimated Zoom would hit $1,500 a share in 2026. From the current share price of $67, that projection implies a 2,138% upside in just over two years.
That said, Wood and her team may have lost faith in Zoom. The stock was once one of Ark’s top five holdings, but it’s no longer in the top 100. That’s not surprising given the circumstances. Zoom shares have steadily fallen since the pandemic, with the stock currently trading 88% below its all-time high.
Ark’s valuation model for Zoom is still publicly available, however. So here’s what investors need to know about the ailing communications software company.
Zoom is a leader in unified communications software
Zoom is best known for its videoconferencing software, Zoom Meetings. That product was so popular during the pandemic that Zoom reached $2 billion in revenue faster than any software vendor in history. Zoom Meetings is still the leading videoconferencing software with about a 55% market share, according to Statista.
But Zoom has a lot more functionality in its unified communications platform. It also supports telephony (Zoom Phone), customer service (Zoom Contact Center), team chat, virtual events, and webinars. Zoom has also developed a number of artificial intelligence (AI) tools that improve productivity and automate workflows on its platform, as outlined below:
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Zoom Revenue Accelerator analyzes interactions in Zoom Meetings and Zoom Phone to provide insights that help you increase the productivity of your sales team.
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Zoom Virtual Agent is an intelligent chatbot that automates customer service workflows in Zoom Contact Center.
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Zoom AI Companion is a digital assistant that integrates with other Zoom products to help you compose messages, summarize conversations, and surface insights.
It is important that consultancy Gartner Gartner, Inc. has recognized Zoom as a leader in unified communications as a service for four years in a row. The most recent report cited key strengths as contact center capabilities and deeply integrated artificial intelligence tools. Gartner also noted that Zoom has done a good job of upselling videoconferencing customers with adjacent products.
Zoom estimates its market value to be worth $125 billion by 2026. The company attributes about 85% of that total to its videoconferencing, telephony and contact center products, with artificial intelligence tools making up the remaining 15%.
Low single-digit growth has become the status quo for Zoom
Zoom reported better-than-expected financial results for the second quarter of its fiscal year 2025 (ended July 31), but the numbers themselves were disappointing. The number of business customers fell 12% to 191,600, and the average business customer spent 2% less over the past year. In turn, revenue rose just 2% to $1.1 billion, and non-GAAP (adjusted) net income rose just 4% to $1.39 per diluted share.
Management provided some encouraging information. The number of Zoom Contact Center customers has more than doubled in the past year, and 1.2 million customer accounts have enabled Zoom AI Companion. That suggests Zoom is successfully driving adoption of products outside of its core video conferencing solution. Additionally, remaining performance obligation increased by 8%, suggesting potential (albeit modest) acceleration in sales in the coming quarters.
Zoom shares are trading at a modest valuation
Wall Street expects Zoom’s earnings to grow 8.4% annually over the next three years, a modest acceleration from the low-single digits status quo. The consensus revenue estimate makes the stock’s current valuation of 24.1 times earnings look a bit pricey, but not outrageous. Those numbers translate to a PEG ratio of 2.9, which is actually a discount from the three-year average of 5.5.
To be fair, Zoom has zero chance of delivering the quadruple-digit returns implied by Ark’s valuation model, at least not through 2026. However, Zoom has a median 12-month price target of $74 per share, which implies a 10% upside from the current share price of $67. Investors interested in owning this potential turnaround stock should consider a small position today.
Should You Invest $1,000 in Zoom Video Communications Now?
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zoom Video Communications. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
1 Surprising Artificial Intelligence (AI) Stock You Need to Buy Before They Surge 2,138%, According to Ark Invest by Cathie Wood was originally published by The Motley Fool