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Many investors have lost interest in Zoom Video Communications (ZM 1.10%) since the pandemic faded, and I doubt many consider it a worthwhile artificial intelligence (AI) stock today. But Cathie Wood's Ark Invest remains very bullish. The firm has 4.6% of its invested assets in Zoom, and the stock is the sixth-largest holding across its portfolio of innovation-focused index funds.

That conviction may surprise some investors, but Ark published a valuation model last year that posits substantial growth opportunities in AI-enabled communications software driven by digital transformation and increasingly mobile workforces. Wood and her team believe Zoom could trade at $1,500 per share by 2026, implying 2,175% upside from its current price.

Here's what investors should know.

Zoom grew at an incredible pace during the pandemic, so much so that its revenue run rate reached $2 billion faster than any other software company in history. That sent the stock into the stratosphere. But sales growth has since decelerated sharply, and the stock has fallen 88% from its all-time high in October 2020.

Yet, the investment thesis for Zoom has actually gotten stronger as its portfolio has expanded over the last three years. The company is best known for its market-leading videoconferencing application Zoom Meetings, but its platform also includes an enterprise phone system, contact center software, and messaging capabilities, among other communications products.

Zoom has also developed several adjacent artificial intelligence (AI) tools that boost productivity and automate various workflows across its platform, including:

Collectively, Zoom says those products will address a $125 billion market in 2026. Management attributes most of that sum to Zoom Meetings (36%) and Zoom Phone (30%), though Zoom Contact Center (17%) and adjacent AI products (15%) are also significant growth opportunities.

Notably, consultancy Gartner has recognized Zoom as a leader in unified communications for three consecutive years, and the most recent report identified the brand authority of Zoom Meetings, the rapid growth of Zoom Phone, and the somewhat recent release of Zoom Contact Center as key strengths.

Zoom has a strong presence in a large market, but its financial results have been consistently mediocre and the company failed to break that mold with its third-quarter report. Enterprise customers increased only 5%, and the average enterprise customer spent just 5% more. Growth in both metrics reached an all-time low.

Additionally, online/self-service customer churn continued to improve, but sales in that cohort still declined 2% during the third quarter. As a result, total revenue rose only 3% to $1.1 billion, a deceleration from 4% revenue growth last quarter and 5% revenue growth last year.

There were a few bright spots, though. Non-GAAP net income jumped 24% to $401 million as the company kept expenses in check, Zoom Phone reached 7 million paid seats (up from 4 million five quarters ago), and Zoom Contact Center surpassed 700 customers (up from 500 last quarter).

Momentum in Zoom Phone and Zoom Contact Center is particularly encouraging because those products represent substantial upsell opportunities. Specifically, Zoom reported 219,700 enterprise customers in the second quarter, but less than 15% use Zoom Phone and less than 1% use Zoom Contact Center.

Here's the bottom line: Investors should expect more lackluster results in the coming quarters, but top-line growth could accelerate meaningfully once Zoom Phone and Zoom Contact Center reach critical mass and become larger contributors to total revenue. And adjacent AI software and future product launches -- such as the recently announced AI-enabled collaboration tool, Zoom Docs -- leave room for additional upside.

Ark Invest's valuation model for Zoom posits that strong adoption of its core communications software and adjacent AI products could drive sales to $52 billion in 2026. That forecast implied annual revenue growth of 66% when the valuation model was published last year, but it now implies annual revenue growth of 112%, which is nonsensical at this point.

Morningstar analyst Dan Romanoff has more measured expectations. He believes adoption of Zoom Phone and Zoom Contact Center will push revenue growth back into the double digits in the medium term, resulting in a compound annual growth rate of 7% over the next five years.

In that context, the current valuation of 4.3 times sales looks reasonable. Investors should consider buying a small position in this growth stock today.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zoom Video Communications. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

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1 Surprising Artificial Intelligence (AI) Growth Stock to Buy Before It ... - The Motley Fool