Can Zoom live without the virus?

Zoom Video Communications, Inc. (ZM) began trading in April 2019, in the same quarter as the likes of Lyft, Pinterest or Uber. Contrary to their fellow debutants, many of which were household names, Zoom was not a widely recognized brand at the time. The company was perceived merely as one of many newly listed tech stocks, far from the household recognition it enjoys today. Nevertheless, as its share price fell by nearly 20% in reaction to news confirming the effectiveness of Pfizer’s vaccine, the question of whether their pandemic-fuelled success is sustainable arose.

 

Despite a successful debut where it secured 356.8 million USD in capital from the public, closing out the IPO-day up 72% at 62 USD, it was not until a year later that the stock started drawing significant interest amid the spread of COVID-19. Doubling its IPO-day closing price around mid-April 2020, ZM traded as high as $588.84 (+850% relative to the first trading day close) on the earnings release in November. When the vast majority across the globe were forced to stay at home and transition their lives online, Zoom was the natural first choice for many, as it offered a superior product to its competitors. It was easy to use and free (for a standard user), but most importantly, it simply worked and could be relied upon. Consequently, their quarter over quarter revenue figures grew by an astonishing 74% and 102% in April and July 2020 respectively.

 

Zoom’s product seemingly addressed the general dissatisfaction with the alternatives available on the market at that time, something the CEO, Eric Yuan, was aware of and even pointed out in his letter to shareholders in the lead up to their IPO. However, fast forward nearly two years, the competitors are catching up. Zoom’s product, despite (once) being superior, is not hard to replicate. Zoom is rated 4.5 out of 5, according to G2, a peer-to-peer software review site, based on roughly 33 thousand reviews – the most among its twenty alternatives featured in the comparison. Even though that places them at the very top end of the spectrum, some of the main competitors, Google Hangouts Meet and BlueJeans Meetings, fall behind only slightly according to the very same ranking. With scores of 4.4 and 4.3 respectively, it is safe to conclude that the market offers plausible substitutes.

 

Another factor raising concerns is Zoom’s revenue breakdown by customers. Zoom is seemingly losing one of the most important target markets in the industry- the corporate sector. According to a survey by Enterprise Technology Research (ETR), up to 62% of revenue streams flowing from enterprises of ten or more employees, while the remaining 38% can be traced back to businesses with a headcount of less than ten. The same survey points out that, in 3Q 2020, both Microsoft Teams and Cisco Webex increased their market share among Fortune 500 companies, contrary to that of Zoom which diminished. Zoom offers five different products, with the most famous one being Zoom Meetings. This shows that Zoom is losing the large corporate market share they once had. This is alarming, given those clients are the ones most likely to subscribe to Zoom’s paid plan. Additionally, the trend might be explained by the fact that, amid the global economic downturn and the subsequent wide-spread cost-cutting policies, many businesses are seeking cost-effective solutions. Teams, which is a part of Microsoft’s Office package most of the companies are already paying for (83% of enterprises used MS Office in 2017 according to Spiceworks), seems like a natural first choice. It was, indeed, cited as the primary pick of those leaving Zoom according to ETR.

 

Nonetheless, the above scenarios are unlikely to mean an abrupt end of Zoom’s business, but rather a gradual process where the first-mover advantage fades away as their competitors catch up. According to Kate Lister, CEO of Global Workspace Analytics, 70% of all people will work from home at least five days every month by 2025. Therefore, as long as Zoom can continue to deliver seamless video services, they should be able to claim their share of the market. Additionally, the company seems to be conscious that there may be limited opportunity to differentiate itself in the video conferencing field. According to its COO, Aparna Bawa, the company’s vision spans beyond videoconferencing. Facilitating more intimate human interactions, with the ability to shake hands or hug being among some of the features the CEO strives for. While it is uncertain how the company will materialise this vision, it is worth mentioning that the company has the financial strength for such product development. With 1.87 billion USD in cash on their balance sheet and an impressive debt/equity of 4.7%, the company has significant resources available to invest in potential projects, with very little tied up in future repayment obligations. Moreover, on 12th January 2021, Zoom announced that it would issue 4.4 million shares in a secondary offering to raise 1.5 billion USD, which will double its current equity position. They explicitly mentioned that some of that will be used to make strategic investments and acquisitions.

 

Overall, Zoom stock has undeniably been a profitable investment since it started trading in April 2019 (+500.11% as of 31st January 2021). Although being relatively expensive, with a P/E ratio of 257.8 (the industry average at 39.2), the company is financially stable and has enjoyed some great momentum. According to experts, video conferencing will not disappear and should remain a significant part of our lives even after lockdown measures are lifted. What seems to be more important, however, is how Zoom decides to differentiate itself from the already competitive crowd and continue adding value for its shareholders. Time will tell whether Zoom is able to successfully realise their vision of becoming a game-changer in the world of human interactions. However, until a number of these uncertainties surrounding Zoom crystalize, analysts’ consensus regarding the recommendation of ‘hold’ is unlikely to change.

 

By Jakub Glinkowski

Sector Head: Daniel Regan

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