Cathie Wood And Ark Invest Still Bullish On Zoom After Earnings Report — Here's Why

Zinger Key Points
  • “We underestimated the online churn that would take place as brick-and-mortar businesses reopened,” Ark Invest said.
  • The well-known ETF company added to their Zoom position after quarterly earnings.

Shares of Zoom Video Communications ZM traded lower last week after reporting quarterly financial results. Ark Invest and CEO Cathie Wood were buyers of the dip and remained bullish on the company’s long-term outlook.

What Happened: Zoom reported second-quarter revenue of $1.1 billion, an 8% year-over-year increase. The total came in shy of a Street estimate of $1.12 billion. The company’s second-quarter earnings per share of $1.05 beat a Street estimate of 93 cents per share.

Non-enterprise online customers slowed down in the second quarter, something Ark admitted they might have missed in their bullish take.

“We underestimated the online churn that would take place as brick-and-mortar businesses reopened,” Ark Invest said in an email.

The ETF manager sees the big story for Zoom being its enterprise business.

“Our Zoom investment thesis hinges on our projection that the majority, if not all, of Zoom’s business by the end of 2026 will be focused on enterprise customers.”

The company reported that the number of customers representing $100,000 or more in trailing twelve month revenue was up 37% year-over-year in the second quarter. Overall enterprise customers were up 18% year-over-year to 204,100 in the second quarter.

“We believe enterprise customers will continue to rise as a percent of revenues.”

Ark points to the potential that the online weakness shown by Zoom in recent quarters has or will peak this year.

“We believe churn in this segment should normalize by the end of 2022 as customers with a preference for physical communications churn over the next two quarters.”

Ark also points to new products like Zoom Phone and Contact Center outperforming the company’s core products.

“We maintain our high conviction in Zoom and its potential to become a leading communications platform for enterprise-to-enterprise communication.”

Related Link: Zoom Video Investors Pull Back On Q2 Earnings: EPS Beat, Revenue Miss, Guidance Update And More

Why It’s Important: The bullish take from Cathie Wood and Ark Invest on Zoom shouldn’t come as a huge surprise, given the stock is one of the fund’s largest positions.

The company’s flagship ETF Ark Innovation ARKK owns $650.2 million in Zoom shares, which makes it the second-largest position at 7.9%. Only Tesla Inc TSLA, a long time Ark staple, is a larger holding in the company’s largest ETF, representing 10.2% of assets in the ETF.

In the Ark Internet Innovation ETF ARKW, Zoom is the second-largest holding at 7.2% of assets, making up $99.7 million in investments. Only Roku Inc ROKU represents a larger portion of the ETF at 7.4% of assets.

The two Ark ETFs recently bought the dip, with ARKK adding 713,062 shares of Zoom on Tuesday and ARKW adding 126,239 shares of Zoom the same day. Both purchases each represented around 0.73% of assets in the respective ETFs.

The bullish take by Ark Invest on Zoom comes as other analysts are lowering their price targets after the earnings report.

Long-term, Ark Invest has a price target of $1,500 on Zoom by 2026 with the bull case seeing $2,000 per share and the bear case seeing $700.

ZM Price Action: Zoom shares closed 0.50% lower on Monday at $81.00, versus a 52-week range of $79.03 to $184.91.

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