[ad_1]
In 2023, nearly every company on the planet pushed to incorporate artificial intelligence into their operations and products. In fact, AI is driving significant productivity gains for knowledge workers around the world. And as companies strive to make their employees more efficient, some are poised to make big profits.
Zoom video communication (ZM 0.09%) has built several AI capabilities to help remote workers, from salespeople to software engineers, use their time more efficiently. And Ark Invest believes Zoom’s AI-related products and services have the potential to significantly boost revenue. The analyst team led by Cathie Wood has set a 2026 price target of $1,500. This means that the stock is up 2,139% as of this writing, which is a significant increase.
And Ark Invest is putting its money where its mouth is. Zoom is the 5th largest holding in the flagship company Ark Innovation ETFit is also the fourth largest holding in the world. Ark Next Generation Internet ETF.
Here’s exactly why Ark analysts think Zoom’s AI innovations will support its massive price target.
The most important drivers of Zoom’s business
“In our view, the most important driver of the company’s business is Zoom’s ability to monetize its users,” Ark analysts wrote last year in an article detailing Zoom’s long-term financial model for stock. Ta.
Zoom expects average revenue per user (ARPU) for its core video conferencing service to rise from $113 in 2022 to $188 in 2026. This corresponds to an annual growth rate of approximately 13.6%. Unfortunately, Zoom fell below that rate in his first three quarters of 2023 (fourth quarter results not yet available). As of the end of the third quarter, business customers were up approximately 5% year-over-year. Meanwhile, total revenue increased by just 3%.
But the real growth in revenue per user will come from AI-enabled products and services, according to Ark analysts.
Arc expects Zoom to increase its core videoconferencing revenue by 50% to 100% with its AI services. In other words, the company believes its AI services could double Zoom’s ARPU by 2026.
Zoom released Zoom IQ in 2022 to help sellers improve their performance by providing advanced analytics on video and phone sales calls. Building on this, we’ve included new features such as meeting summaries and advanced chat creation tools. Upcoming AI-powered features currently in development include features such as chat thread summarization, better organization of ideas, and real-time translation. Zoom is also considering using generative AI to develop sales training that simulates sales situations.
As Zoom looks to incorporate more and more AI capabilities into its core video conferencing, telephony, and contact center products, its average revenue per user should improve over time. It remains to be seen whether AI products and services will account for one-third to one-half of that revenue.
When Ark Invest may be too optimistic
Ark Invest not only expects AI products and services to significantly increase revenue per user, but also expects Zoom to attract even more paying users. Specifically, we expect the conversion rate from free users to paid users to improve significantly over time.
Its model predicts that 17% of Zoom users will become paying customers in 2022, rising to 50% by 2026. This is a threefold increase for him in just four years. That percentage should rise over time as small businesses grow and become more reliant on Zoom or find premium features appealing, but it’s unlikely that Zoom will ever reach such a high level of conversion rate. sex is very low.
This casts doubt on Ark’s forecast for $51.8 billion in revenue by 2026. That said, even with slightly higher penetration rates, sufficient ARPU growth should continue to support solid revenue growth. Investors can expect stronger sales growth next year after the company’s customer churn was higher than expected in its most recent quarter, but probably not at the levels Ark analysts are modeling. You can take an optimistic view.
Moreover, after reducing headcount and improving efficiency this year, there may not be any more room to improve operating margins. Ark expects its adjusted EBITDA margin to rise from 42% to 46% by 2026. Zoom’s non-GAAP operating margin improved to 39.4% through the first nine months of this year, an increase of 3.5 points, but it is unlikely to repeat that performance.
Zoom may not have 2,139% upside, but it’s still a buy.
A company that can improve its annual recurring revenue by a small amount each year can still be a very valuable company to own. And at today’s valuation, Zoom still looks like a great investment opportunity.
Zoom has the potential to turn into a powerful free cash flow producer thanks to its subscription model. Management expects free cash flow to increase 13% this year thanks to efficiency improvements, but this metric should continue to rise over time. The company’s stock currently trades at just 15.4 times free cash flow, which is a fair price and should support multiple Zoom shares for some time.
Downside risk at this price shouldn’t be much of a concern, as Zoom stock should be able to deliver solid returns to investors given its moderate sales growth and stable operating margins. On the other hand, if Cathie Wood and Ark Invest’s forecasts turn out to be largely accurate, there could be a significant upside.
[ad_2]
Source link
