Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and activism, today issued a detailed report entitled “Zooming To Share Price Upside” that outlines why we believe and estimate that shares of Zoom Communications, Inc. (NASDAQ:ZM) (“Zoom” or the “Company”) have well over 100% long-term upside potential, representing the opportunity for material market outperformance.
Executive Summary
Over the past 17 years, Spruce Point has conducted deep forensic research of public companies across the world. Our mission has always been to present a variant viewpoint of companies which we feel are misunderstood by the market. Often, our work has led us to high conviction strong sell opinions. After all, we believe there is a structural bias on Wall Street towards overly rosy recommendations. However, today we present the opposite viewpoint – through our forensic research process we believe that we have identified a very attractive opportunity in a market leader trading well below intrinsic value with a roadmap for shareholder value creation. We are pleased to share with you this strong buy recommendation.
After conducting a forensic review of Zoom Communications, Inc. (Nasdaq: ZM, “Zoom” or “the Company”), we see material upside potential in the Company’s shares. Zoom is the leader in video communications and was a COVID-19 pandemic darling. However, a growth slowdown, persistent skepticism regarding its market opportunity and competitive position, and the current SaaS-pocalypse have, we believe unfairly, driven Zoom’s valuation to egregiously low levels, particularly considering the Company’s estimated $1.2 billion stake in AI leader Anthropic. Beyond failing to find credible evidence to support the bear thesis, we have identified a broad set of recommendations for Zoom’s management and Board that we believe can drive a stock re-rating and significant share upside. Based on our research, we also believe management is open to our suggestions and will carefully consider our recommendations which we have shared with the Board.
Zoom Adeptly Managed Through A Revenue Explosion For The Ages and Emerged an Even Stronger Competitor
Zoom was founded by former Cisco engineer Eric Yuan in 2011. The Company went public in April 2019 with $330 million in LTM revenue. When the COVID-19 pandemic hit less than a year later, Zoom became one of the most spectacular growth stories in history. Zoom’s revenue grew $3.5 billion over just two years, and the Company’s name achieved “verb” status. However, unlike many typical bubble companies, Zoom retained its revenue scale and market leadership. After achieving what might have been a decade of growth in just 18 months, normalizing topline growth and multiple compression were inevitable, yet remarkably, Zoom has never reported a YoY decline in quarterly revenue. Leading an organization through such extremes generally requires vastly different managerial skillsets. We believe CEO Yuan should be commended for not just landing the plane but continuing to grow and improve the business. Not only does Zoom remain the leader in video conferencing, the Company has also transformed its product portfolio into a unified platform, expanded its addressable market, and positioned itself to be an artificial intelligence (AI) beneficiary, all while generating over $9.4 billion of cumulative free cash flow, achieving top-tier GAAP profit margins, and consistently beating Street consensus across all major metrics.
Why Does the Opportunity Exist? A Tired Bear Thesis and the Unprecedented Bearishness of the SaaS-pocalypse
Despite these accomplishments, Zoom is trading at a material discount to its intrinsic value, SaaS company peer multiples, and its own post-COVID-19 historical multiples. Today’s AI fearmongering is founded on concerns that AI kills most enterprise software, either through vibe-coded apps or complete displacement by the developers of foundation models, and/or causes such extreme workforce reductions as to materially reduce paid seats. We have no doubt that AI will be a disruptive force across a range of industries, yet we can’t shake the feeling that the SaaS-pocalypse is a fear bubble. As usual, Spruce Point finds itself playing devil’s advocate. Our conversations with highly experienced software engineers suggest such solutions cannot easily meet the rigor, reliability, and legal requirements of incumbent SaaS solutions, and there is little evidence that enterprises are abandoning existing products. Foundation models are also not well-positioned to displace solutions such as Zoom given the underlying requirements and the Company’s unique tech stack. In fact, consistent with Zoom’s “federated” AI strategy, we believe the foundation model companies such as Anthropic are seeking to complement, not displace, incumbent SaaS products. Importantly, these fears overlook Zoom’s substantial competitive advantages: its massive user base, unique data trove, and global server infrastructure. To the extent AI does cause worker displacement, enterprises will seek to supercharge the capabilities of remaining employees with the AI-enabled productivity tools that Zoom sells. And many employees leaving large companies are likely to land at small-to-mid-sized companies that are Zoom’s bread and butter. To be honest, we don’t see an end to human involvement in business any time soon, and for those who do, there are other areas of the economy that will suffer much worse and long before the SaaS sector. Even before the onset of AI worries, Zoom suffered from a bearish narrative that it will remain a niche video solution that will inevitably donate share to the Microsoft Teams boogeyman, thus harming both its prospects for broader enterprise penetration and constraining revenue growth. We believe there remains little evidence to support this view.
A Transforming Zoom is Proving the Doubters Wrong; We Believe Revenue Growth is Poised to Inflect
We believe investors have failed to acknowledge the remarkable transformation occurring at Zoom. Product innovation, sound engineering execution, and a handful of well-conceived tuck-in acquisitions have enabled Zoom to create a comprehensive, highly integrated, and AI-first platform of productivity solutions that span the breadth of core enterprise workflows. Moreover, Zoom has adopted a coherent AI strategy to enhance platform value and drive effective monetization. Zoom’s AI Companion has seen consistent 3-4x YoY monthly active user (“MAU”) growth over the past year and is now enabling true agentic capabilities. Strong attach rates for premium AI customizations is proving out Zoom’s monetization strategy. The Company’s Zoom Phone offering surpassed 10 million seats in FQ3 2026, has likely reached $1 billion in annual recurring revenue (“ARR”), is still growing at mid teens rates YoY, and has been the top share gainer in the unified communications as a service (“UCaaS”) market. The contact center as a service (“CCaaS”) market is a hotbed of AI innovation, and Zoom’s Contact Center offering is seeing rapid adoption: deal size records are being broken, ARR is growing high double-digits, and >$100K in ARR customer growth is ~100% YoY. In addition, the popular Workvivo solution is seeing explosive customer and ARR growth, albeit off a small base, while tapping into an incremental human resources opportunity. At the same time, Zoom’s best-of-breed video conferencing solution is holding its own against Microsoft Teams. Its superior performance, reliability, and total cost of ownership advantage have caused the vast majority of enterprises to retain Zoom even if they are Microsoft 365 subscribers. Finally, much to the bears’ chagrin, Zoom’s Online segment has stabilized and returned to growth, completing a painful yet inevitable post-COVID-19 customer base normalization that was a material headwind over the past five years.
Current Street consensus calls for just 4% YoY revenue growth each of the next two years, yet we see the emergence of an improved growth algorithm at Zoom. The Company is proving it can drive deeper and accelerating enterprise penetration with an array of new products that are growing at double-digit rates far in excess of the Street’s 4% target. Enterprise >$100K customer and segment revenue growth reached 9% and 7%, respectively, in the recent FQ4, so as the segment contributes an increasing share of total revenue (61% in the recent FQ4), an overall growth inflection is inevitable. More broadly, Zoom’s new platform approach is driving larger deal sizes, higher win rates, improved competitive positioning, and higher customer retention, enhancing all the factors that underlie SaaS model success. Finally, we believe Zoom can address the two boat anchors that have prevented the Company’s enterprise success from being fully reflected in corporate results. The Online segment is in the midst of a turnaround, and we believe the Company’s long underperforming international business can benefit from a restructuring, sales capability upgrade, and an improved go-to-market strategy. Taken together, we believe Zoom is poised to achieve mid-to-high single digit growth rates well above current consensus. Since Zoom’s modest growth in recent years is arguably the primary driver of its depressed valuation, we believe this growth acceleration will drive a meaningful re-rating of Zoom shares.
Despite This Improved Outlook, Zoom Trades at Depressed Levels
Based on current FY2027E Street consensus, Zoom trades at just 4.1x revenue, 9.5x EBITDA, and 16.1x free cash flow, levels that represent 13-31% discounts to its peers and that are not just low for a leading technology company but low on an absolute basis. This is despite Zoom’s consistently high and improving GAAP gross margins (77% in FY2026), leading 39% GAAP net profitability (despite being a poster child for its once-excessive stock-based compensation expense), and rich 40% free cash flow margins. In fact, Zoom can check just about every box on the list of company attributes that typically drive the endowment of premium valuation multiples. Zoom’s valuation also seemingly ignores the fact that the Company owns an estimated $1.2 billion stake in arguably the world’s enterprise AI leader, Anthropic. Anthropic’s growth has been mind-boggling, and we see value accruing to Zoom beyond just investment returns, as its Anthropic partnership should bolster its own AI innovation and credibility. To us, this begs the question whether investors need to rethink how they value more mature yet highly profitable SaaS companies, as we see little rationale for a company like Zoom to trade at a 22-32% discount to technology companies from other sectors with similar low-growth, high-margin financial profiles. Some may make the SaaS-pocalypse argument de jour that AI has destroyed the terminal value for all software companies. Yet even using conservative consensus forecasts, Zoom’s valuation is well-supported by the present value of its rich cash flows. We, however, do believe Zoom’s terminal value, absent a likely takeover scenario, “has value” and thus calculate its intrinsic value to be 40% above current levels just using consensus numbers.
We See Clear Opportunities to Accelerate Shareholder Value Creation: We Have Nine Core Recommendations
Based on our conversations, we believe Zoom senior management is open to engaging with investors to consider value enhancing alternatives. Thus, we have written a letter to Zoom’s management and Board of Directors outlining our recommendations for how the Company can increase shareholder value. Our recommendations span issues related to corporate governance, financial policies, and cost structure.
- Improve capital allocation: Zoom has nearly $7.8 billion of net cash and should generate close to $2 billion a year in free cash flow going forward. While we laud its increased focus on share repurchases, its recent activity pales in comparison to its lower-growth, highly cash-generative peers. We highlight the recent buyback transactions executed by Salesforce and Wix as prime examples of the more aggressive actions Zoom should take. We recommend a $4 billion modified Dutch auction tender as the most shareholder-friendly alternative. In addition, based on our assessment of other technology sector dividend payers, we believe Zoom should initiate a $1/share dividend (1.1% yield). Doing so would signal management’s confidence in the Company’s long-term earnings power, enforce financial discipline, and generate incremental demand for Zoom shares from long-term and income-seeking investors. Our recommended $4 billion share repurchase would be 10% accretive to non-GAAP EPS. In addition, dividend initiations have typically resulted in 3-5% one-day returns, and that excludes the longer-term benefits of incremental investor demand from a new and broader investor base.
- Reallocate and reduce operating expenses: Relative to its peers, Zoom underspends on R&D relative to S&M, and the Company’s sales investments are clearly generating questionable returns. Moreover, we find that, despite reducing headcount 15% in early 2023, Zoom has failed to rationalize its headcount post-COVID-19 to the same degree as other more aggressive peers. In fact, Zoom’s revenue per average employee has declined 14% since 2020. By contrast, peer and large cap SaaS medians grew 53% and 44%, respectively. Moreover, when we calculate an estimated revenue per average employee for Zoom’s Enterprise segment, it falls consistently below peer medians. With AI already driving improved organizational efficiencies and the partner channel playing a larger role in go-to-market strategy, we see ample opportunity to pursue material headcount reduction outside R&D. Given the growth rates associated with its newer products, increasing enterprise penetration, opportunities for improved marketing, and AI monetization, we believe Zoom can achieve 130bps and 300bps revenue upside over the next two years. Combining these impacts with our recommended operating expense reductions could increase Zoom’s two-year EBITDA CAGR from 4.0% to 13.3%. Based on our analysis, this could drive an EV / EBITDA multiple re-rating from the current 9.5x to 19x. This multiple expansion coupled with $172 million of incremental EBITDA could drive 83% share upside. In addition, it is well known that recent significant workforce reductions by companies such as Block, Meta, Salesforce, and Atlassian have been met with highly positive stock price reactions.
- Restructure and refocus the international business: Despite Zoom’s universal popularity and exceptional performance with international video, the Company’s international business has underperformed. Zoom’s international revenue CAGR materially trails that of US revenue on both a 3- and 5-year basis (1% vs 5% and 11% vs 14%, respectively). As a result, Zoom has generated low and declining international revenue per average employee since FY2022. Also, Zoom’s international revenue mix trails that of most SaaS peers at just 28% in FY2026. Our research suggests the “order-takers” who cleaned up during the pandemic are struggling to actually “sell”. Troublingly, Zoom’s commentary on its international business is rarely more than a recitation of unremarkable growth rates. Something is clearly broken with Zoom’s go-to-market for the vast international opportunity. We recommend an assessment of sales personnel and a revamped go-to-market strategy.
- Improve marketing: Zoom could not have better name recognition, but we fear the Company is not adequately leveraging its brand equity. Unfortunately, the Zoom brand remains inextricably linked to its video conferencing application. The result has been an inability to shake a “consumer-only” perception, a failure to properly educate the market on the value delivered by (or even the existence of) its diversified enterprise platform, and suboptimal sales enablement. We believe this is a missed opportunity for the Company.
- Avoid M&A mistakes: We view Zoom’s failed Five9 acquisition as a cautionary tale. The Company violated its stated M&A strategy guidance and inked a $15 billion all-stock deal, only to have Five9’s failed shareholder vote save Zoom from itself. We fear that a massive cash war chest and the current AI fervor will lead Zoom to be overly aggressive in an environment of inflated private company valuations.
- Consolidate insider selling: Zoom insiders are increasingly seeking liquidity. We would like to see Yuan and others consolidate their sales rather than creating a constant flow of shares coming to market. A marketed secondary offering or a structured sale to a financial partner would reduce pressure on the stock. In addition, we believe a financial investor could be a beneficial addition to a management team needing a push on capital allocation and a Board light on strategic financial sophistication. Based on our analysis, we suspect the sale of secondary shares to a credible financial investor could result in a 10%+ share price reaction, as well as provide valuable guidance to the Zoom Board on maximizing shareholder value going forward.
- Collapse dual-class share structure: Zoom’s Series B shares held by CEO Yuan are subject to a 15-year sunset provision. Given Yuan’s 57% reduction in ownership since IPO and current 7% stake (comparing unfavorably to typical 10% sunset thresholds), we believe there is a strong case for Zoom to collapse all shares into common. The most common sunset term is 7 years (which implies an April 2026 expiry), and an accelerated collapse would address some of the moral hazard issues created in the lead up to its expiry. We acknowledge the debate around the extent to which dual-class share structures drive discounted valuations. However, research suggests that collapsing a dual-class share structure can result in 4-10% one-day stock returns.
- Lobby for S&P 500 inclusion: Zoom is a premier technology company with a ubiquitous global presence and a highly profitable business model. We believe it is an excellent candidate for the S&P 500 index, and the Company will be even more so if it can execute on our recommendations. We would like to see the Company proactively lobby for index inclusion. We highlight that previous technology company additions to the index have averaged 17% share price returns as a result.
- Pursue a sale of the Company: While we believe Zoom has work to do near-term to drive a re-rating, we see a sale of the Company as the ultimate desired outcome. That said, we wouldn’t be surprised to see a private equity buyer act sooner to reap the benefits of some of our recommendations for themselves. We believe Zoom should pursue a sale transaction if management cannot drive shareholder value creation within a year. We view Zoom as a highly attractive acquisition target and believe there is a broad universe of potential strategic buyers with massive financial wherewithal. Our analysis of the largest software buyouts of the past five years suggests a 33% premium from private equity could set an M&A valuation floor.
Read the full report here by Spruce Point Capital Management
