I've recently discovered a trade opportunity involving Zoom that I would like to share. You may ask, out of all companies, why Zoom? And you are right—since its massive breakthrough and tremendous user growth in 2020, Zoom hasn't grown or changed much at all. The demand for their product is still there, millions of people use it every day, and the company generates a lot of cash. However, its business has plateaued, and it is unlikely to show any meaningful revenue or net income growth anytime soon.
But when you look closer at the numbers, things get interesting. As I'm writing this, Zoom Communications (Ticker: ZM) trades below $95 per share. Its market capitalization is $28.5B. Its Enterprise Value (EV) — which is market cap plus net debt — is around $20B. The fact that EV is smaller than the market cap means the company has negative net debt, meaning they hold more cash than debt. This is a huge factor when figuring out a company's true value.
Zoom currently earns about $2B annually. That puts its standard Price-to-Earnings (P/E) ratio at about 15x Next Twelve Months (NTM) earnings. But because Zoom has so much cash on hand, if we substitute Market Cap with EV and divide it by earnings, the EV/Earnings multiple drops to just 10x. That is inexpensive for a company with stable, recurring revenues and strong cash flow.
However, the real reason I am buying Zoom right now is its hidden asset: Zoom owns roughly a 0.5% stake in Anthropic.
Back in May 2023, Zoom invested in Anthropic when the AI startup was valued at around $5B. Today, Anthropic's private valuation is $960B. This is the valuation at which the company has closed its latest funding round. All this means Zoom's tiny slice is now worth about $5B!
On top of that, Anthropic is expected to go public through an IPO later this year. Experts estimate its value could hit between $1T and $1.5T right after the IPO, with the stock likely to surge even higher immediately after the IPO. It is completely reasonable to expect that once Anthropic starts trading this fall, Zoom's stake could be worth $7.5B.
I expect Zoom to eventually sell this stake on the open market after the IPO lockup ends, raising an extra $7.5B in cash. If we adjust Zoom's current $20B Enterprise Value by subtracting that $7.5B cash windfall, its adjusted EV drops to $12.5B. Divide that by their $2B in earnings, and Zoom's true adjusted valuation multiple is 6.25x! This is a bargain.
I believe that as the Anthropic IPO approaches, Wall Street will start giving Zoom credit for this massive hidden asset. Right now, I think Zoom shares are undervalued by at least 30%. I plan to hold my position until this discount to its fair SOTP, or Sum-of-the-Parts valuation (that is Zoom's existing business value plus the Anthropic stake) narrows, and I think the Anthropic IPO will be the perfect catalyst to trigger that move.