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If Vimeo (NASDAQ:VMEO) continues to provide successful streaming experiences, I would be expecting sales growth to be equal to 29%-13%. Besides, with new integrations with cloud-based software applications and new large organizations becoming clients, sales growth could even touch 25%-31%. In any case, I believe that the company is really a buy. Under my most optimistic case scenario, the fair price is equal to $55, which is far above the current market price of ~$32.50.
Vimeo’s Business Model And Spin-Off Transaction
Headquartered in New York, Vimeo offers software as a service for users looking to share video and streaming content. The company offers a significant number of cloud-based tools empowering free and paid users to communicate and create new content on a turnkey platform.
Source: Company’s Website
On May 25, 2021, VMEO executed a spin-off transaction and separated from IAC/InterActiveCorp (NASDAQ:IAC). The fact that VMEO was part of a large corporation like IAC may be appreciated by the investment community. Notice that IAC has a market capitalization of more than $10 billion. It is also well known that spin-off transactions are followed by stock returns.
VMEO Continues To Offer Quality Products, And Expands Internationally
VMEO’s adoption is mainly driven by the number of users who share videos. When users upload new content, usually new members decide to experience VMEO. In the process, VMEO’s customer base increases, the company receives more audience, more users may publish new videos, and Vimeo links are also shared much more online.
With VMEO’s adoption process noted, in my view, what really matters is offering high-quality free products. Free users will most likely pay for subscription plans if VMEO’s products and content are very interesting.
VMEO’s platform not only offers streaming of high dynamic range (HDR) video in up to 8K resolution, it also appears to offer best-in-class playback and live streaming experiences for large and small audiences across different geographies and for multiple devices. In sum, I believe that the products offered are of great quality, which will contribute to user growth. As a result, sales growth will be elevated in the near future:
Source: Prospectus
I also believe that VMEO has sufficient cash on hand to attract more subscribers outside the U.S. through marketing and sales efforts. The main rationale is that the company’s business model is working well in the United States. VMEO has accumulated a significant amount of know-how on how to attract new users. Hence, with a small number of marketing efforts, user growth may be higher outside the United States:
Source: Prospectus
With the previous assumptions, I included sales growth of 31% in 2023-2024 and declining growth from 29% in 2025 to 13% in 2030. Note that my numbers are approximately close to that of other market analysts from 2021 to 2023 and very conservative from 2024 to 2030:
Source: Expectations From Market Analysts
Source: Qingshan Capital Management
I would expect CFO/Sales to increase over time because the company will most likely receive beneficial effects from economies of scale. With that, I used a constant 11% CFO/Sales ratio because I want to be very moderate in my FCF estimations. If we sum everything, the free cash flow would grow from close to $41 million in 2022 to more than $291 …….