Wrongly Punished: The Vimeo Stock Has More Potential Than You Might Think
Vimeo, a SaaS company that is heavily weighted in my model portfolio, plunged 20% after the Q4 2024 numbers. What's next?
This is an update of a Vimeo stock analysis first published on November 10th, 2024. It has been updated and expanded following the release of the fourth quarter fiscal 2024 numbers.
The stock of the video platform Vimeo has been one of my most successful investments in 2024, with a price increase of 72%. Once again, shareholders' patience was rewarded, as Vimeo stock had languished in my investable model portfolio for more than 18 months at prices below $4.
For several quarters now, the Vimeo stock has reacted strongly to new numbers. In response to Q2 and Q3 numbers, the stock jumped 23% and 44%, respectively. And now, after the Q4 FY24 numbers, the big disappointment for shareholders who had recently been spoiled by success followed: the Vimeo stock lost about 20% of its value in just one trading session after earnings came in weaker than expected.
There's a lot to explain, so let's dive into the numbers:
Vimeo's 2024 Financials
Vimeo reported solid results for the fourth quarter of 2024, with no major negative surprises.
Bookings, which lead to revenue, grew 4% year over year to $105 million. The revenue was $103 million, again down slightly year-over-year.
Vimeo generated a free cash flow of $11 million in Q4, slightly above the year-ago quarter. Like the analysts, I was expecting more here.
Vimeo's Q4 net profit of $1.5 million was well below the same quarter last year ($8.4 million at that time) and below analyst estimates. This was probably the main reason for Vimeo's share price crash after the Q4 numbers.
I would caution against short-term valuation of a stock like Vimeo based on quarterly earnings. After the successful turnaround with the new CEO in the second half of the year, management launched an investment offensive. Spending on product development was increased and a new management team was hired. It is not really surprising that these measures - especially on a GAAP basis - weigh on profitability in the short term.
If investors look beyond the quarterly results and focus on the full year 2024, they can see that the positive trend is continuing:
Revenues in 2024 were stagnant at $417 million year-over-year, while gross margin was also nearly flat at 78%.
A 20% reduction in marketing and selling expenses more than offset increased R&D and new management team costs, and free cash flow increased by over 50% to $57 million compared to 2023, representing a margin of 14%.
GAAP operating income also increased 43% to $19 million.
Net income was as high as $27 million thanks to interest income from the company's strong cash reserves.
The goal for Vimeo is not to maximize short-term profitability, but to return the SaaS company to a sustainable double-digit growth path. If it can do that, cash flow and earnings will inevitably follow.
To understand Vimeo's investment case, it is extremely important to look at the revenue streams of the three segments separately, as they evolve very differently:
1. Vimeo Enterprise
Vimeo Enterprise is the fast-growing B2B business with medium and large enterprise customers. This segment continued to show an impressive bookings growth in Q4, up 39% to $30 million, as in previous quarters. This segment now represents 29% of the total bookings.
The Vimeo Enterprise segment revenue increased 37% to $23 million in the fourth quarter. The number of customers grew +19% year over year to 4,000. Average annual revenue per customer increased +12% to $23,500.
2. Self-Serve & Add-Ons
The online distribution of the Vimeo product for small businesses and creators continues to be the largest business unit. With revenues of $68 million and bookings of $62 million, this business still is the mainstay of the company, representing over 65% of revenues.
This self-servce business grew rapidly during the covid pandemic, but has struggled with declining sales since the end of the pandemic. Unfortunately, the downward trend could not be stopped in the last quarter of 2024.
Bookings in this segment declined by a further -6% year-over-year in the fourth quarter. The number of subscribers actually declined by -11% to 1.3 million. Revenue declined by -8% as the subscriber decline was partially offset by price increases. These figures look worrying at first glance, but they must always be seen in the context of significantly reduced advertising spending.
3. Others
In the Others segment, revenues in the fourth quarter were down a further 16% year-over-year. This was due to the discontinuation of various older legacy products. Revenues were only $15 million, or 14% of total revenues. Bookings, which lead to revenue, were $11 million.
The majority of this “Others” revenue is now attributable to the OTT product. This is the product purchased in 2016 for customers who want to monetize their video content through their own live streaming channel. OTT now accounts for well over 80% of revenues in the "Other" segment.
Bookings for this OTT product are now growing again. In Q4 2024, four new OTT customers signed up to pay a six-figure annual subscription fee to Vimeo. The "Other" segment is expected to return to (single-digit) revenue growth in 2025. Together with the Enterprise segment, it now accounts for approximately 40% of total bookings.
Vimeo Outlook For 2025
As it did last year, Vimeo's management has disappointed investors with its initial guidance for the year 2025.
Revenue for the first quarter of 2025 is expected to be just under $100 million, with another operating loss of $9 million.
Revenue for the full year 2025 is expected to grow at a low single-digit rate, with growth accelerating as the year progresses.
Full year 2025 operating loss is expected to be approximately $5 million and adjusted EBITDA is expected to be $25 million to $30 million.
At the end of the year (Q4), double-digit growth is expected to return for the first time since 2022.
Net income and free cash flow are therefore expected to decline significantly in 2025 compared to 2024. This is due to an investment program of up to $30 million to strengthen product development and enterprise sales and to achieve double-digit revenue growth again by the end of 2025.
Based on last year's experience, I expect Vimeo's management to be VERY cautious in their initial guidance for 2025. In fact, I would be surprised if Q1 revenues fall below $100 million again.
As a reminder, in 2024, Vimeo also initially announced an operating loss for the full year. After several quarters of beating and raising, it ended up with a GAAP operating income of $19 million, representing a margin of 5%.
This makes it all the more surprising that the company's conservative guidance for 2025 predicts a return to double-digit growth towards the end of the year. What sounds rather optimistic on the surface is actually a very predictable development:
The Enterprise business is now so large that it will increasingly be reflected in the overall numbers. Vimeo Enterprise bookings grew by 38% in 2024. If the Enterprise revenue follows this trend in 2025, that would mean a +9% increase in total revenue.
I expect self-service revenue to be roughly flat in 2025. The lower number of subscribers will likely be offset by higher prices. The new AI features, such as AI-powered video translation, will also be available in the self-service segment starting in 2025 and should improve the monetization of this user base.
I also believe that the Other segment will generate stable revenues from 2025 on. From 2025 onwards, this segment could be renamed to OTT, after other legacy products have been discontinued, in order to create more clarity in the reporting. After all, OTT now represents more than 80% of this segment.
Overall, I think Vimeo will grow in the mid-single digits in 2025.
That means revenues should be around $440 million in 2025. If all goes well, there could be a return to double-digit growth in the second half and especially in 2026, as management has forecasted.
This is significantly more than analysts have been expecting. I expect that their revenue forecast, which was previously only $455 million for 2026, will have to be revised upwards later this year.
What About Vimeo's Profitability In 2025?
The announced $30 million investment program from Vimeo means that profits and cash flow are likely to decline in 2025. Unfortunately, the announced return to growth does not come without a cost.
In particular, building a sales organization for the Enterprise product is inherently very expensive. Javier Ortega Estrada, a highly experienced SaaS Enterprise Sales executive, was brought on board as CRO (Chief Revenue Officer) in early 2025. He spent many years at Dropbox, where he helped the company to grow from $200 million to $1.8 billion in revenue.
At Vimeo, he now has a clear mandate to position the company for future double-digit growth. As is often the case, the new CRO is likely to bring some of his closest associates with him to Vimeo. Such a sales team consists of highly paid people who need to be enticed with attractive compensation packages. Unfortunately, we won't know if that money was well spent until the second half of this year at the earliest, or even until 2026. But in enterprise SaaS sales, a few key people truly can make a huge difference.
With this investment offensive, Vimeo has abandoned its target of a double-digit margin in 2025. The current fiscal year will be a transition year and should set the stage for a much higher valuation as a growth company in the future.
But that's a long way off, so let's look at the appropriate valuation for the Vimeo stock today.
Valuation Of Vimeo Shares
After the drop in price following the Q4 numbers, Vimeo is now trading at under $5.90 with a market cap of $970 million. If you add in the company's debt-free cash reserves of over $300 million, you get an enterprise value around $650 million.
In other words, for an EV/Sales ratio of less than 1.6, you get a (single-digit) growing SaaS company with a gross margin of nearly 80% that is also profitable under GAAP and on a clear path to double-digit growth again from 2026. The enterprise value to free cash flow (TTM) ratio is below 12.
This means that Vimeo is very attractive again after the recent decline in its share price. In my opinion, the company should be worth at least three times its revenues. Therefore, I think a $10 share price for Vimeo over the next 12 months is realistic. If the company returns to sustainable double-digit growth starting in 2026, a much higher price target with an EV/sales ratio of 5-6 would be fair in the longer term. But we won't be talking about that until the end of 2025 at the earliest.
A nice confirmation of my optimistic view on the company comes from the CEO, CFO, CTO and a board member who all increased their own holdings of Vimeo shares at prices around $5.40 after the Q4 earnings crash.
Vimeo's lack of investor attention is currently preventing the stock from achieving a sustainable increase in value. Hardly any professional investors are interested in the company. Vimeo's Q4 2024 earnings call was over after only 20 minutes. Again, only three analysts were present to ask questions to the CEO and CFO.
I still read that Vimeo is seen by many retail investors as a failed YouTube alternative and a loser in the AI age. This tells me that these people have not looked at the business model or the product development over the last few quarters.
Conclusion
Vimeo delivered solid results in Q4. Once again, the enterprise business performed particularly well, and the live streaming product also stabilized. With a focus on new AI-based product features in the currently still struggling self-service segment, the company should be well positioned under its new management to grow profitably in the future.
Vimeo's management expects to achieve growth in bookings and revenue, as well as positive earnings and positive cash flow in 2025. A return to double-digit growth should be possible by the end of the year. If these growth targets are met, the stock could see a real re-rating.
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*Disclaimer: The author and/or related persons or companies own shares in Vimeo. This post is an expression of opinion and not investment advice.