To The Moon

In 2023, almost every company on the planet was integrating AI into their operations and products. AI is driving a significant increase in the productivity of knowledge workers around the world. As businesses strive to improve employee efficiency, one company stands to reap huge benefits.

$Zoom(ZM)$ has built multiple AI capabilities to help remote workers, from salespeople to software engineers, make more efficient use of their time. Analysts at Cathie Wood's flagship fund Ark Invest believe that Zoom's AI-related products and services will significantly increase revenue.

The team led by Ms. Wood has set a target price of $1500 for the stock by 2026. That represents a whopping 2139% increase from the trading price at the time of this writing.

Zoom is the fifth-largest holding in $ARK Next Generation Internet ETF(ARKW)$ and the fourth-largest holding in $ARK Innovation ETF(ARKK)$ Here's why Ark analysts believe that Zoom's AI innovations will support the stock's pursuit of its target price.

ARKK ETF--ark-funds.com

ARKW ETF--ark-funds.com

1.The most important driver of Zoom's business

"We believe the most important driver is Zoom's ability to monetize users," Ark analysts wrote last year in an article detailing a long-term financial model for Zoom's stock.

Average revenue per user (ARPU) for Zoom's core video conferencing services is expected to climb from $113 in 2022 to $188 in 2026. That represents an annual growth rate of approximately 13.6%. Unfortunately, Zoom hasn't been able to meet that growth rate in the first three fiscal quarters of 2023.

According to Ark analysts, the real growth driver in ARPU will come from AI-powered products and services. Ark believes that Zoom can increase core video conferencing revenue by 50% to 100% through AI services. Zoom also hopes to use generative AI to help develop sales training and simulate sales scenarios.

Over time, ARPU for Zoom will improve, but it remains to be seen whether AI products and services will contribute one-third to one-half of revenue.

2.Ark Invest's investment may be too optimistic

Ark Invest also expects Zoom to attract more paying customers and predicts that the conversion rate from free users to paying customers will increase significantly over time.

Ark Invest's model predicts that the proportion of paying customers among Zoom's user base will climb from 17% in 2022 to 50% in 2026. But the reality is that Zoom is unlikely to achieve such a high conversion rate. This calls into question whether Zoom will achieve the expected $51.8 billion in revenue by 2026.

More importantly, there may not be much room for improvement in operating margins after this year's layoffs and efficiency improvements. Ark expects adjusted EBITDA margins for Zoom to rise to 42% to 46% by 2026. Although Zoom's non-GAAP operating margin increased by 3.5% to 39.4% in the first nine months of this year, it is unlikely to repeat that performance.

3. $Zoom(ZM)$ shares may not have room to rise as much as 2,139%

At today's valuation, Zoom shares still look like a good investment opportunity. When considering moderate revenue growth rates and stable operating margins, Zoom stock should provide investors with handsome returns.

On the other hand, if Ms. Wood and Ark Invest's predictions are close to accurate, then there could be significant upside potential for Zoom's stock price.

Disclaimer: "Please note that the information provided in this stock analysis article is for educational and informational purposes only. It should not be considered as financial advice. Always conduct thorough research or consult with a qualified financial advisor before making investment decisions."