Will Zoom Stock Hit $1,500 a Share by 2026?
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One of our core mantras at Nanalyze is that if 95% of professional investment managers can’t beat a broad market benchmark, it’s highly, highly unlikely that an all-night session of LMGTFY will lead you to the next Microsoft or Google. Indeed, a recent study that looked at the performance of more than 64,000 global stocks between January 1990 and December 2020 found that more than half underperformed one-month U.S. Treasury bills in terms of compound returns. If that’s not enough to drive you into going all-in on vino investing: Just 2.4% of stocks accounted for all of the $75 trillion in net global stock market wealth over those 30 years.
A Brief History of the ARKK Effect
That brings us to professional investment manager Cathie “Risk is my Shtick” Wood, founder and CEO of Ark Invest, an investment management firm that in recent years played kingmaker among tech stocks until the kingdom fell into ruin this year. As we’ve noted previously, Ark Invest has an almost insatiable appetite for risk. Nobody complained when the firm’s flagship exchange traded fund (ETF), ARK Innovation ETF (ARKK), provided investors with triple-digit returns during the height of the pandemic. On the flip side, this year’s slide in the tech sector has sent ARKK and its sister EFTs into a tailspin.
Here’s a brief arc on how ARKK has performed since it premiered at the end of September 2014 against Invesco QQQ Trust (QQQ), a gold-standard ETF that tracks the 100 largest non-financial companies on the tech-heavy Nasdaq:
We can see four distinct stages.
- Between October 2014 and May 2017, ARKK trailed behind the gentle wake of QQQ.
- Then there was a slight shift, with ARKK modestly but consistently outperforming the QQQ index fund for roughly the next three years.
- The real tectonic uplift occurred after March 2020 when the world locked down and the digitization of nearly everything became a hot commodity among investors. By January 2001, the fund was up nearly +575% since its inception.
- The recent quake in the markets that started at the end of last year has brought tech stock values crashing down, with ARKK falling even harder based on its high-risk, high-reward portfolio.
What’s next for ARKK? Well, the firm is hardly backing down from its investment theme of disruptive technologies, and investors seem to be following suit with net inflows of around $1.3 billion this year for ARK’s flagship ETF. Half of the top 10 holdings in this fund also appear as loves or likes in our Nanalyze Disruptive Tech Portfolio, so we share a certain amount of simpatico. However, we’ve always viewed stocks like Moderna (MRNA) and Zoom (ZM), as a pandemic one-hit wonder like the song Ice, Ice Baby. But the latter is now the No. 1 holding in Ark’s flagship ETF, accounting for about 10% of the entire portfolio. In addition, the big brains at the investment firm recently published a report claiming that Zoom stock would hit $1,500 a share by 2026 – and that’s the baseline estimate between the most bullish and bearish scenarios.
Does this bullish analysis reflect the central role that Zoom will play in the future of communication or is it just a bunch of … bullishness?
About Zoom Stock
It’s easy to forget that Zoom only IPO’d in April 2019, so that most of its life as a publicly traded company has been during The Rona. In fact, during that topsy-turvy market turmoil in March 2020, investors accidently bought shares of Zoom Technologies, an obscure company that had not filed any paperwork with the Securities and Exchange Commission (SEC) since 2015. The SEC actually suspended trading of ZOOM until the confusion could be cleared up. But Zoom the videoconferencing company eventually became synonymous with video chatting, just as Skype had been the previous decade. We no longer Skyped but Zoomed, just like we’ve been Googling for years.
Zoom has become not just a household verb, but a $32 billion company with revenue of $4.1 billion for what the company calls its 2022 fiscal year (even though we’re mainly talking about 2021). That represents a jump of about 65% from the previous year. Between 2020 and 2021, Zoom revenues increased by 425%. Based on Ark’s open-source research and model, Zoom would have to experience an annual growth rate of 76% to approach $1,500 a share and a market cap of $240 billion, even as some human beings return to that place once called “the office.” Let’s look at what the analysts are saying will drive that growth.
The Bullish Case for Zoom
Those so inclined can take a closer look at the Ark Invest Zoom valuation model. The firm ran 10,000 simulations to forecast where Zoom stock would land by 2026. While there are a number of factors in play, analysts identified four main growth drivers:
The first one is all about the number of people (ie, knowledge workers) who shower before they go to work. And now that many of them are working remotely, it’s not clear if they’re even showering every day. Last year, Gartner estimated that about half of all of these white-collar workers, about one billion people, had adopted a hybrid or fully remote working model. The analysts believe the most likely scenario is that about 75% of these people will be working away from the office at least part of the time by 2026.
The bigger question is how many of them will be Zooming versus jumping on Microsoft Teams or Google Meet, among all of the other options out there today. Analysts agree that Zoom will likely lose market share overall, from an estimated 43% in 2021 to the baseline projection of 35% in 2026, though it could drop as low as 20% of the total addressable market (TAM) or soar back to 50% of the TAM. This is probably a good time for a brief aside on the actual market that we’re talking about here.
The Market for Unified Communications
While most of us may still think Zoom is just for video conferencing, the platform has expanded to include a range of different products, including phone and chat services, virtual events and webinars, and most recently a Zoom contact center for managing customer service. This bundle of services has become known as unified communications (UC) – basically, how an enterprise or even smaller business integrates all of its various internal and external communication channels. Gartner estimates that global spending on UC will hit about $53 billion in 2025, up from about $45 billion today.
The analysts at Ark Invest think that’s way too conservative. They believe the TAM for UC could scale to $330 billion. Here’s some of the back-of-the-napkin math:
- Based on about one billion remote or hybrid knowledge workers at a current TAM of $45 billion, companies are only spending about $4 per person today.
- More and more companies will realize the value of cloud-based UC systems like Zoom, with spending predicted to hit $25 per month by 2026 based on a compound annual growth rate of 40%.
- Where will this money come from? Some of it will simply shift buckets from the $1.4 trillion currently spent on enterprise communications, while companies could also tap the $1.4 trillion spent on global travel. Why fly when you can Zoom?
- By 2026, there will be more than 1.1 billion knowledge workers X $25 per work = $275 billion. Not sure where $330 billion comes from, but you get the idea, right?
The logic is that Zoom doesn’t necessarily have to capture more market share if the TAM itself expands exponentially – and if Zoom can make more money per customer.
Can Zoom Capture More Paying Customers?
In fact, analysts identify Zoom’s ability to increase the number of paying customers and spend per customer as the main drivers behind its $1,500 per share projection. The current estimate is that just 17%, or 36 million customers, actually pay Zoom for its services. They believe that the baseline number will be closer to 50%, mainly composed of enterprise customers, by 2026.
How does that compare to the current reality? As of the end of April, Zoom counted nearly 200,000 enterprise customers, about 20% more than a year ago. Of those paying customers, almost 3,000 (or about 1.5%) spend at least $100,000 over a 12-month period. That’s up nearly 33% from a year ago, so the numbers are certainly headed in the right direction. In addition, the most recent quarterly dollar-based net retention – how much money existing customers are continuing to spend – was 123%. That’s pretty good, but actually down a bit from last year’s 130%.
One of the more interesting spins from the analysts is about where the increase per paying customer will come from. The first isn’t surprising: Customers will opt to switch subscriptions from video conferencing-only to a bundled solution containing video conferencing, phone, and chat, among other products. The second definitely seems more speculative: In April 2022, Zoom released Zoom IQ, an analytics solution that uses conversational artificial intelligence (AI) to help sales teams. Analysts believe this product along with future AI-related products and services will increasingly account for more customer spend in a pretty short amount of time:
That’s especially bullish given that Zoom just rolled out the new product a few months ago. The ability of Zoom to leverage their massive amount of big data one of the four major barriers to entry ARK cites in their bull thesis.
- Infrastructure – borne out of the pandemic boost
- Enterprise readiness – features specific to business usage
- AI data advantage – it’s all about the data
- Ecosystem of integrations – a spiderweb of connections
A better quality of call, advanced security features, and the fact that it’s not Microsoft are said to be how Zoom has managed to achieve a leading market share of 43% in remote communication worldwide.
Should You Buy Zoom Stock?
ARK makes their spreadsheet available for anyone to play with, and it’s a monstrously cool piece of work that any MBA would wear with pride. The problem is that it’s entirely disconnected from the metrics that Zoom provides. They start with an estimate of Zoom usage from SimilarWeb – 212 million users – and then estimate how many are paying based on logic that doesn’t seem to be provided. They then take that number – 36 million – divide annual revenues by it to get an average revenue per user (ARPU) of $113. That’s the basis of their entire model and it’s entirely unrelated to the metrics that Zoom provides investors. In other words, there’s no way we can track the success of the model’s predictions aside from arbitrary share prices and, of course, overall revenue growth.
This is where the growth rates proposed by Ark Invest analysts just don’t seem sustainable. For instance, first-quarter revenue for Zoom’s current fiscal year was $1.07 billion, up just 12% year over year, but essentially flat from the most previous quarter. For the full fiscal year, Zoom is estimating revenue of between $4.53 billion and $4.55 billion. Even the high end only represents revenue growth of about 10% – far, far short of the 76% annual growth required to hit $50 billion in revenue by 2026. Even the bear case – $30 billion in revenues for 2026 – appears like a bull in disguise. After this year’s lackluster showing of 11% growth, they’ll then need to show 60% revenue growth per year for the next four years to hit the bearish revenue target.
On one hand, the projections from analysts seem fantastical and even whimsical. On the other hand, it seemed impossible that Tesla (TSLA) would exceed $1 trillion in market cap. Yet it happened, however briefly, and the company still carries a market cap of about $700 billion. So there’s a lot of future faith baked in those values. Incidentally, Ark Invest projects Tesla stock to hit $4,600 by 2026, so it’s apparently at a bargain price at the moment, based on that model prediction.
Investors interested in riding this bull might at least wait until results roll in over the next quarter or two. In July, Zoom will limit its one-on-one video-conferencing calls to just 40 minutes in an obvious attempt to convert some of those freeloaders basic customers to paying customers. But Google Meet and Microsoft Teams, which are two of the top competitors, don’t appear to have any plans to follow suit. There’s also what we’re calling the Netflix effect: Paying subscribers will use their enterprise account for personal communications, so there’s always a friend with Zoom access to count on for those of us too cheap to pay.
Conclusion
No one can predict the future, not even Cathie Wood. We continue to stick with the conclusion from our recent piece on How Long Will the Current Bear Market Last?: As long as you’re invested in quality companies, the rest is so much noise. There’s no particular reason not to buy Zoom, just don’t do it because of a wildly optimistic Monte Carlo method that’s based on lots of assumptions.
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very interesting… on another note is INTC and others oversold?
Regarding INTC, we haven’t been following them at all. Mainly we’ve focused on NVIDIA, but it appears that Intel is trying to reinvent themselves. Would they be considered disruptive or simply trying to recapture lost ground?
I see 3 problems with ARK:
1. Making extremely bullish projections.
2. Poor risk management – they make too big bets on some stocks and later when those stocks fail, that hurts their portfolio. Example: TDOC.
3. They missed on some huge winners like: ENPH, SEDG.
Betting huge amount of money on ZM and at the same time not having a position on ENPH or SEDG is for me a sign something is wrong with their methodology.
1. Perhaps the bullish call on Tesla gave them the fortitude to make another bullish call. At least they backed it up with a sophisticated model and then open sourced it.
2. Being such a large active manager does them no favors
3. As risk-averse investors we have no FOMO. Hard to say why ARK didn’t dabble much in renewables (from what we can see)
They’re an active manager so we will never truly understand the reasons. After a decade passes we’ll see how they fared.
ARK kept buying Zoom in 2021 and 2022. Now Zoom is its no 2 position worth $727M (no 1 Tesla is $855M).
Avg price ARK was buying Zoom was over $280. Zoom share price is $72. So ARK’s loss on Zoom is around 75%.
Is it a madness or maybe Cathie Wood knows something we don’t know ?
They have very strong conviction for the Zoom thesis. Trying to figure out how an active manager thinks based on their current position weightings can be tough. ARK talks to management teams of the companies they hold which can be a double-edged sword.
Zoom now became AKR’s no 1 position (ahead of Tesla). Yesterday ARK was buying Zoom. So far they have 75% loss on Zoom position.
Having such a huge bet on a questionable stock seems to me a very risky thing.
There are lots of other good stocks ARK could buy now. Eg one of them could be Array Technologies – they don’t have it in their portfolio.
So to me it looks like ARK is fanatic with the stocks they selected and cling to them and want to prove they were right.
Zoom was a pandemic stock and now we are post pandemic, so it is uncertain how Zoom will perform going forward.
You can bet that Zoom isn’t a questionable stock in their minds. You are someone who sometimes really shows conviction – like Array just right now – so you understand how that can feel. Having too strong of convictions can be a dangerous trap to fall in, so we always need to be skeptics. ARK has spelled out their bull thesis along with all the assumptions, we just didn’t find it compelling is all. Time will tell.