Immersive AR VR Learning And AI Personalization Will Reshape Long Term Education Demand

Catalysts

About zSpace

zSpace provides AR/VR powered learning experiences and career exploration tools for K-12, CTE and workforce education.

What are the underlying business or industry changes driving this perspective?

• Rising demand for immersive STEM and CTE learning, supported by deployments such as GEMS Education in Dubai and projects in Italy, Bulgaria, Poland and the broader Middle East, positions zSpace to capture more classrooms globally, which can support higher software led revenue over time.
• The growing focus on career and skills based education, reflected in strong interest in the AI powered Career Explorer application and CTE conferences like ACTE, can deepen zSpace’s role in workforce pathways and support higher bookings and software mix that benefit gross margins.
• Industry wide adoption of AI for personalization and translation, with zSpace already using AI across more than 50 languages and embedding AI into applications, can increase engagement and global usability, supporting renewals and higher annualized contract value.
• The ongoing shift in the business toward software and services, which represented 57% of Q3 revenue and contributed to a gross margin of 51.2%, creates more recurring style opportunities and operating leverage that can support earnings quality as volumes stabilize.
• Hardware progress, including the Inspired laptop and a new interaction stylus that reduces peripherals and shipping complexity, together with moving core components out of China, points to structurally lower unit costs and logistics expenses that can support gross margin and net margins.

Assumptions

This narrative explores a more optimistic perspective on zSpace compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming zSpace's revenue will grow by 8.5% annually over the next 3 years.
• The bullish analysts are not forecasting that zSpace will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate zSpace's profit margin will increase from -69.1% to the average US Consumer Services industry of 12.7% in 3 years.
• If zSpace's profit margin were to converge on the industry average, you could expect earnings to reach $5.1 million (and earnings per share of $0.14) by about January 2029, up from $-21.8 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 27.0x on those 2029 earnings, up from -0.7x today. This future PE is greater than the current PE for the US Consumer Services industry at 17.3x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.14%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Year to date revenue of US$23 million was 22% lower than the prior year and bookings of US$22.7 million were 35% lower over the same period. This suggests that softer demand and slower deal flow, if they continue, could limit top line growth and delay any improvement in earnings.
• Key software health indicators are under pressure, with annualized contract value at US$10.2 million, 10% lower than 12 months earlier, and net dollar revenue retention at 77% for larger customers. This signals weaker upsell and renewal trends that could restrain recurring software revenue and weigh on gross margins.
• The company is highly exposed to U.S. K-12 and CTE funding. Management highlighted ongoing uncertainty from tariff policy, education budgets and even a government shutdown that delayed access to federal funds. If these issues persist or worsen, they could prolong unpredictable purchasing patterns and keep revenue and earnings volatile.
• Two large customers reduced their software spend from a seven figure renewal level to a mid six figure level despite keeping the same device footprint. If similar budget cuts spread to other districts or are not reversed over time, this could pressure software mix, slow ACV growth and limit further improvement in net margins.
• The business remains loss making with adjusted EBITDA losses in Q3 still close to US$2 million and only US$4.3 million of cash. If revenue softness and funding uncertainty continue while operating expenses keep rising, the company may face pressure on cash flows and its ability to move toward sustainable earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for zSpace is $3.0, which represents up to two standard deviations above the consensus price target of $2.3. This valuation is based on what can be assumed as the expectations of zSpace's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.0, and the most bearish reporting a price target of just $0.9.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $40.3 million, earnings will come to $5.1 million, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $0.51, the analyst price target of $3.0 is 83.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.