Buying This Hidden Software Stock Might Just Give You Massive Exposure to the Anthropic IPO

Anthropic's initial public offering (IPO) appears to be on pace to take place in late October or early November. Right now, it is difficult for retail investors to get a stake in the artificial intelligence (AI) giant, which is one of the fastest-growing businesses in the world.

But there is an investment you could make that would get you sizable indirect exposure to Anthropic ahead of its listing. Zoom Communications (NASDAQ: ZM), the leading cloud video conferencing company, bought a stake in Anthropic back in May 2023, and that investment could now be worth billions.

Let's see whether that makes Zoom stock a buy right now.

Zoom's stake in Anthropic, estimated

Zoom made a $51 million investment in Anthropic in May 2023, and that has turned out to be one of the smartest decisions the company has ever made (maybe even smarter than its choice to go public right before the pandemic).

The valuation of Anthropic has been climbing, and Zoom has regularly reflected that growth on its balance sheet. As of the end of its last quarter, it valued its stake in the company at $3.13 billion, a figure it based on the $965 billion market value that Anthropic was credited with in its last private equity funding round.

If Anthropic goes public later this year as expected, it will be targeting a valuation of $2 trillion or higher. Depending on how the resulting dilution shakes out, Zoom's stake in Anthropic could be worth around $7 billion at the time of the IPO, up from just $51 million a few years ago. Compared to Zoom's current market cap of $27 billion, that stake would be 26% of its equity value.

Image source: Getty Images.

How is Zoom's business actually doing?

Since its pandemic boom period, Zoom's business has gone through many gyrations. Today, its subscriptions for online video calls seem to have stabilized, albeit at a much lower revenue level, with churn stable at 2.9% last quarter compared to a year prior.

The company continues to make strides with its enterprise suite, which saw 8% revenue growth last quarter. Total remaining performance obligations grew by 14% to $4.5 billion. Enterprises are expanding their contracts with Zoom because of the new products it has launched in recent years, such as Zoom Phone, call center services, AI note-taking, and many other custom solutions for larger developers.

At the same time, it is now a genuinely profitable business, with a GAAP (generally accepted accounting principles) operating margin of 25% last quarter, and $1.9 billion in free cash flow over the last 12 months.

ZM Shares Outstanding (Quarterly) data by YCharts.

Is Zoom stock actually a buy?

When evaluating Zoom stock, it is smart to weigh it relative to the company's enterprise value (EV), a metric that factors out its equity investments and the cash on its balance sheet. That's because with Zoom, its Anthropic stake and other equity investments in start-ups may be worth $7.5 billion at the time of the Anthropic IPO.

Subtract that from the $27 billion market cap, and you have $19.5 billion. Moreover, Zoom also had around $7.2 billion in cash and equivalents on its balance sheet. Subtract that from the market cap as well, and you get an enterprise value of $12.3 billion.

Over the last 12 months, Zoom has generated earnings before interest and taxes (EBIT) of $1.2 billion and free cash flow of $1.9 billion. That gives it an EV/EBIT ratio of just below 10 for a business with steadily growing revenues.

Plus, Zoom management is starting to use some of its cash to repurchase stock. Shares outstanding are now down 6% from their peak. Some investors might prefer a more aggressive pace of buybacks given the company's relatively massive cash pile and its nice free cash flow generation, but even the current level of repurchases adds to the argument that Zoom Video stock looks like a solid buy at today's prices.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zoom Communications. The Motley Fool has a disclosure policy.