Professional money managers are under a lot of pressure to do a good job because they are in charge of billions of dollars in client funds. ARK Invest, Cathie Wood’s company that focuses on new ideas, is no different.
The ARK Innovation ETF, the company’s main fund, has more than $8 billion in assets. Cathie Wood has put a lot of money on Zoom Video Communications (NASDAQ: ZM). With a 7.1% stake, it’s the fund’s fifth-largest investment and is worth almost $600 million.
ARK thinks that by 2026, the stock will be worth $1,500. The stock is now worth about $71, which is 88% less than its all-time high. So, does Cathie Wood’s very positive view of the stock mean it should be bought?
In the first few months of the pandemic, Zoom was a big hit on the stock market. When almost everyone switched to video calls to talk during lockdowns, the company saw a huge increase in sales. Zoom’s sales grew 369% year over year at its peak, at the end of fiscal year 2021.
But that also sped up years of growth that could have happened, making it hard for Zoom to keep going after the pandemic ended. In the third quarter of fiscal year 2024, sales only went up 3.2%. The stock has dropped a lot because of this slowdown.
However, Zoom’s huge growth is resulting in great earnings growth thanks to operating leverage, which is when income grows faster than costs. Over the past year, the company has made over $1.3 billion in cash gains. It now has $6.5 billion in cash on hand, which is almost 30% of its market value.
With 219,700 business users, Zoom has built up an impressive customer base. You could make more money by selling these customers some of Zoom’s new goods, such as:
- Zoom Phone is a business phone system that runs in the cloud.
- Zoom Contact Center is a computer call center that can record calls.
- Zoom One has all the tools you need to communicate and work together in one package.
These items are getting a lot of attention so far. In the most recent quarter, there were 700 more Zoom Contact Center customers, and more than 300% more Zoom One customers signed up for Zoom Phone than the year before.
Even a small conversion rate on nearly 220,000 accounts would be a big help, and Zoom is still adding new accounts at a good rate. Not every business buyer needs a contact center. Around the world, there are a lot of businesses.
In the fiscal third quarter, Zoom’s enterprise customer base grew by 5% year over year, and the company kept 105% of its net income. I don’t think Zoom will grow at high double-digit rates again, but I do think that sales will grow by 10% or more every year.