We came across a bullish thesis on Vimeo, Inc. (VMEO) on Substack by Stefan Waldhauser. In this article, we will summarize the bulls’ thesis on VMEO. Vimeo, Inc. (VMEO)’s share was trading at $5.89 as of Feb 28th. VMEO’s trailing P/E was 36.81 according to Yahoo Finance.
Vimeo has been a volatile stock, reacting sharply to earnings results in recent quarters. Following strong rallies after Q2 and Q3 reports, investors were met with disappointment after Q4 FY24 results, as the stock dropped 20% in a single session due to weaker-than-expected earnings. While the immediate reaction was negative, a deeper look into the company’s financials and strategy suggests a longer-term opportunity.
Vimeo reported solid Q4 numbers with bookings growing 4% year-over-year to $105 million and revenue coming in at $103 million, though slightly down compared to the previous year. Free cash flow reached $11 million, marginally improving from last year but falling short of expectations. The most concerning figure was net profit, which declined to $1.5 million from $8.4 million in the prior year, leading to the post-earnings selloff. However, focusing solely on quarterly numbers misses the broader picture. Vimeo has been in the midst of a strategic shift under its new CEO, prioritizing long-term growth over short-term profitability. Increased spending on product development and a revamped leadership team temporarily pressured margins, but these investments are crucial for Vimeo’s transition into a higher-growth SaaS business.
Looking at the full year, the underlying financials tell a more encouraging story. Revenue remained steady at $417 million with a gross margin of 78%. A 20% reduction in marketing and selling expenses more than offset the rise in R&D spending, helping free cash flow surge over 50% to $57 million, representing a 14% margin. GAAP operating income also climbed 43% to $19 million, and net income reached $27 million, boosted by interest income from Vimeo’s strong cash reserves. Management’s goal is not to optimize near-term earnings but to reposition Vimeo for sustainable double-digit revenue growth. If successful, this will inevitably translate into strong cash flow and earnings expansion.
Breaking down Vimeo’s revenue streams further illustrates the company’s trajectory. The Enterprise segment, its fastest-growing division, saw bookings jump 39% year-over-year to $30 million, with revenue increasing 37% to $23 million. This segment, which now contributes 29% of total bookings, added 19% more customers in Q4 while also increasing revenue per customer. The Self-Serve & Add-Ons segment remains Vimeo’s largest revenue driver, contributing 65% of total sales. However, this segment has struggled post-pandemic, with Q4 bookings down 6% and revenue declining 8% year-over-year. The number of subscribers fell 11% to 1.3 million, though price increases partially offset the decline. These figures may seem concerning, but they should be viewed in the context of significantly reduced advertising spending. Meanwhile, the “Other” segment, mainly comprising the OTT product, declined 16% year-over-year due to the discontinuation of legacy offerings. However, bookings for OTT are stabilizing, with new high-value customers signing up. This segment is expected to return to positive growth in 2025.
Despite near-term setbacks, Vimeo’s outlook for 2025 is optimistic. Management initially guided for low-single-digit revenue growth, expecting Q1 sales just under $100 million and an operating loss of $9 million. For the full year, adjusted EBITDA is projected at $25 million to $30 million, with revenue growth accelerating as the year progresses. Importantly, double-digit growth is expected to return by Q4, marking the first time since 2022 that Vimeo would achieve this milestone. While net income and free cash flow are expected to decline in 2025 due to a $30 million investment program aimed at strengthening product development and enterprise sales, these initiatives are necessary to reignite long-term growth.
A crucial factor to consider is the likely conservatism in Vimeo’s guidance. In 2024, the company initially forecasted an annual operating loss but ultimately delivered a GAAP operating income of $19 million. Similarly, for 2025, management’s cautious outlook may set the stage for earnings beats throughout the year. The Enterprise business, which saw 38% bookings growth in 2024, is now large enough to drive overall revenue growth, potentially adding 9% to total revenue in 2025. Meanwhile, the Self-Serve segment is expected to stabilize, with price increases and new AI-powered features, such as AI-driven video translation, improving monetization. The “Other” segment, which is now primarily OTT, should see steady revenue contributions moving forward. Given these dynamics, Vimeo is likely to grow in the mid-single digits in 2025, reaching an estimated $440 million in revenue. If momentum builds in the second half of the year, as management expects, double-digit revenue growth could return in 2026.
This potential acceleration in growth is not yet reflected in analyst expectations. Many forecasts have been overly conservative, underestimating Vimeo’s turnaround efforts. If the company delivers on its growth objectives, its stock could see a significant re-rating, providing an attractive investment opportunity for long-term investors.
Vimeo, Inc. (VMEO) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 27 hedge fund portfolios held VMEO at the end of the fourth quarter which was 25 in the previous quarter. While we acknowledge the risk and potential of VMEO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than VMEO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.