Shares of Zoom Communications (NASDAQ:ZM) climbed around 3% on Friday after Spruce Point Capital Management issued a strong buy recommendation on the stock.
Valuation Seen as Discounted
Spruce Point released a detailed report arguing that Zoom is trading significantly below its intrinsic value, pointing to substantial upside potential. The firm outlined nine key actions it believes management and the board could take to unlock shareholder value.
Capital Allocation in Focus
A central recommendation involves improving capital allocation. Spruce Point highlighted that Zoom holds roughly $7.8 billion in net cash and is expected to generate close to $2 billion annually in free cash flow.
The firm proposed a $4 billion modified Dutch auction tender offer alongside the introduction of a $1 per share dividend, equating to an approximate 1.1% yield.
Cost Efficiency and Growth Potential
The report also flagged opportunities to optimise operating expenses. According to Spruce Point, Zoom’s revenue per employee has fallen 14% since 2020, while comparable large-cap SaaS peers have seen increases of 53% and 44%.
By combining cost reductions with revenue growth initiatives, the firm estimates Zoom could lift its two-year EBITDA CAGR from 4.0% to 13.3%, potentially supporting an 83% increase in the share price.
Strategic Recommendations
Additional proposals include restructuring international operations, enhancing marketing efforts, avoiding missteps in mergers and acquisitions, reducing insider selling, and simplifying the company’s dual-class share structure.
Spruce Point also suggested pursuing inclusion in the S&P 500 and considering a sale of the business if management fails to deliver meaningful shareholder value within a year.
M&A Upside Scenario
The firm added that analysis of major software buyouts over the past five years indicates that a private equity acquisition could imply a valuation premium of around 33%, potentially establishing a floor for Zoom’s takeover value.