Key insights
- Spruce Point is bullish on Zoom due to a perceived misperception of its potential. They recommend improved capital allocation, including a significant stock repurchase program and the initiation of a dividend, given Zoom's strong balance sheet and free cash flow generation. They advise against aggressive M&A, suggesting a focus on operational improvements instead. This could lead to a modest positive impact on the stock.
Spruce Point Capital Management chief investment officer and founder Ben Axler chats with Yahoo Finance's Julie Hyman about why Spruce Point is long on Zoom (ZM).
There's some people that think it's going to be displaced by, you know, the Sasspocalypse or some people that think that it's a one-trick pony, that it's just consumer facing, but we think there's a misperception gap about what the company is, but more importantly, you know, what it can be. And, you know, we've laid out in our report eight to nine simple recommendations that we think can change that perception and importantly valuation gap to get the stock materially higher.
Your first recommendation, for example, is improve capital allocation.
Right. So, I mean, they're over capitalized. They have a pristine balance sheet. We're talking about $8 billion of cash, um a multi-billion dollar uh stake in Anthropic that's sort of a hidden asset on the balance sheet. And yet, you know, the company's bought back a modest amount of stock. We think they could do upwards of a 4 to 5 billion dollar stock repurchase. You know, we also think that they should issue a dividend. Why? Because let's face it, the the company, the growth has matured. Now, we think it's going to inflect higher, but um we think they could support uh, you know, a $300 million a year dividend just with the current cash on the balance sheet. Now, let's not forget this company's going to generate $1.7 to $2 billion dollars a year in free cash flow, so they have to do something with it. And we think, you know, a dividend makes sense and also a more aggressive stock stock repurchase.
One of the things you don't think they should use it for is M&A.
Yeah, well, you know, we don't think they should be more aggressive on the M&A front, but focus on improving operations. So, for example, one of our recommendations is streamline the organization. We've seen headlines of companies like, um like Salesforce, Adobe, Microsoft, now Meta, you know, uh Block, uh trimming uh their workforce uh to implement AI to improve operations. You know, Zoom had a big hiring increase from COVID and their workforce has been pretty stable. They have a somewhat bloated executive management profile. We think they have the opportunity to reduce costs on on that front and also put more uh capital towards marketing. And I said there's a misperception that they're consumer-facing, but they have a big enterprise franchise and they do more than just video. Contact center, workflow optimization. They really need to improve marketing, which we think will also help accelerate the top line.
One of the things you didn't ask uh suggest they do was change their leadership.
Yeah, I mean, we think the CEO is phenomenal, right? I mean, he's, he should be commended for leading this company through a rapid growth phase um during COVID, but yet they've still continued to grow and the margin profile's improved, the cash flow's been robust. Now, we do think that the executive team with 16 members could shrink a little bit. You look at other SAS companies of their size, they operate a more leaner structure around eight to nine. So, we think there's some streamlining to do, but we don't think there needs to be radical change here. We just think they need to do blocking basic blocking and tackling to accelerate the top line a little bit, stream streamline some of the costs, reduce the share count, and that should lead to a higher valuation.