Immersive Digital Learning And CTE Demand Will Drive Long-Term Business Transformation

Catalysts

About zSpace

zSpace develops immersive AR and VR powered learning solutions that combine proprietary hardware, software and AI to deliver interactive STEM and career education experiences for K-12, CTE and workforce markets.

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

• Continued mix shift toward higher margin software and services, now above half of revenue and supported by expanding first party content and AI enabled capabilities, should structurally lift gross margins and improve earnings power as volume recovers.
• Growing global demand for immersive digital learning and skills based training, evidenced by new deployments with GEMS Education and partners in Europe and the Middle East, positions zSpace to diversify away from U.S. K-12 funding volatility and accelerate top line growth.
• Rising emphasis on career and technical education and workforce readiness, coupled with rapid uptake of the new Career Explorer product and broader CTE suite expansions, supports deeper wallet share per customer and higher recurring software revenue over time.
• New hardware innovations such as the Inspired laptop and next generation interaction device, combined with relocation of manufacturing to lower tariff regions, are expected to reduce unit costs and logistics complexity, driving further gross margin expansion and operating leverage.
• Stabilization of federal and state education funding flows, including unencumbered program dollars and consistent Perkins support, should unlock delayed purchasing decisions, translating existing demand and installed base engagement into improved bookings, revenue growth and operating cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming zSpace's revenue will grow by 4.3% annually over the next 3 years.
• 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 12.8% in 3 years.
• If zSpace's profit margin were to converge on the industry average, you could expect earnings to reach $4.6 million (and earnings per share of $0.13) by about December 2028, up from $-21.8 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, up from -0.7x today. This future PE is greater than the current PE for the US Consumer Services industry at 16.8x.
• 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 9.06%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent weakness in the U.S. K-12 funding environment, compounded by government shutdowns and unpredictable flows of federal and state education dollars, could keep bookings depressed and prolong the current 22% year-to-date revenue decline. This could limit the company’s ability to reaccelerate top line growth and expand revenue.
• Signs of demand pressure in the software base, including a 10% year-over-year decline in annualized contract value and net dollar revenue retention of 77% driven by large customers downsizing commitments, indicate that recurring software growth may be more fragile than expected. This could constrain future revenue and earnings.
• Heavy dependence on hardware shipments and up-front recognition of multiyear licenses, combined with exposure to tariff policy and manufacturing transitions, creates pronounced volatility that could reverse recent 640 basis point gross margin gains and delay the path to sustainable profitability and stronger net margins.
• Ongoing operating expense growth, with operating costs up 9% year-to-date and continued stock-based compensation and equity dilution, could outpace revenue recovery if macro and education sector headwinds persist. This could lead to continued EBITDA losses and pressure on earnings and cash flows.
• Early stage international and CTE expansion, including partnerships like GEMS Education and Career Explorer traction, may take longer than anticipated to scale and offset domestic headwinds. This could result in a prolonged period of subdued bookings growth and slower improvement in revenue and overall earnings power.

Valuation

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

• The analysts have a consensus price target of $2.3 for zSpace based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• 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 analysts, you'd need to believe that by 2028, revenues will be $35.8 million, earnings will come to $4.6 million, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $0.5, the analyst price target of $2.3 is 78.1% 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.