Zoom (ZM) is among the top technology companies that investors sought exposure to during the pandemic. When everyone was forced to work from home, Zoom’s video conferencing platform saw absolutely incredible demand.
Now, since the pandemic, Zoom has been able to retain an impressive number of businesses and individuals who signed up for its services. This has meant that the type of cash flow deterioration that many expected has not materialized, and the company has been able to reinvest in its offerings and provide even more value to its end customers.
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In addition to this reality, Zoom has also seen a surge in investor interest (and its stock price, as shown above). And now that some analysts have embraced Zoom as a top investment opportunity, and Baird analysts last week commented on Zoom’s stake in AI darling Anthropic, perhaps this is the growth stock investors are looking for.
Let’s dive into what to make of this recent analyst note and why Zoom looks more attractive than it has in some time.
Once again, I’ve opined that Zoom’s impressive rise in terms of revenue and earnings/cash flow growth is not a one-time pandemic success. Many in the markets seem to agree with this view, and ZM stock has performed well in recent weeks.
However, notable is the strong rally that investors benefited from last week (although this move was later accompanied by some selling pressure thanks to macroeconomic concerns). This move suggests to me that Baird analyst William Power is on to something, with his view that Zoom’s $51 million investment in Anthropic could be the game-changing move investors want to see.
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Crucially, Zoom appears to have both the cash flow and balance sheet capacity to support such investments. In fact, many market participants are clamoring for companies like Zoom with excess balance sheet capacity to put this capital to work on investments that can grow as quickly as possible. For some companies, that may mean reinvesting in their core business. For others, it may mean taking a slice of other larger, faster-growing AI stocks.
I agree that this investment by Anthropic could become a significant deal for shareholders in the future. Companies like Zoom, which can lead future IPOs and enter from scratch with a name like Anthropic, can be significant for long-term investors. In fact, for those who believe this whole AI narrative isn’t overblown, Zoom’s dramatic entry into the AI ​​world (at least from an investment angle) should be considered key to this stock’s thesis.
We know Baird’s Power is very bullish on Zoom’s long-term upside potential. I agree with your views and comments on the enhanced growth potential of this technology company following this key investment.
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However, I also think it’s important to see what the 27 analysts who cover Zoom think of this company. The good news is that there is currently some upside to this group’s Zoom price target, with around 5% upside from here if the analysts are correct.
Now, many of the price targets set for ZM stock were set prior to this stock’s recent rise, driven in part by the aforementioned analyst note on this stock. I think if we see an additional flow of news about a possible expansion of this investment, or other investments made in this space, we could see another rally that takes Zoom even higher.
That said, I also recognize that we may be seeing some anxiety or caution in investing, given the level AI valuations have reached recently. It all depends on the market’s opinion of these AI companies and how soon profitability will arrive.
In my view, Zoom is one of those companies with strong underlying fundamentals that is being driven in part by an exogenous AI tailwind. I like that setup better than investing directly in many of the top AI stocks, so I would recommend investors keep an eye on this name.
On the date of publication, Chris MacDonald had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
