Zoom Video Communications is a video-first communications platform which offers HD video, voice, chat, and content sharing through mobile devices, computers, and various conference room systems. It provides its services through cloud-based peer-to-peer software and offers Zoom Phone, which provides secure call routing, call queuing, call detail reports, call recording, call quality monitoring, voicemail, switch to video, in-bound/out-bound calls and much more. Zoom also offers Zoom Rooms, a software-based conference room system, a Zoom Conference Room Connector, and Zoom Video Webinars to conduct large-scale meetings and online events (e.g., conferences). Zoom also allows developers to integrate its video, phone, and other content sharing into other applications and has a Zoom App Marketplace to allow developers to publish their apps. Zoom had a big boom in business due to the remote work and social distancing policies that came with the COVID-19 pandemic.
At the time of this writing (9/12/2021), ZM is trading at $301.50 with a 52 week range of $273.20 - $588.84 and a market cap of $89.58B. In Q2 of their fiscal year 2022, ZM’s revenue grew to $1,021.5 million, up 54% year over year. The number of customers contributing more than $100k in revenue grew 131% year over year and the GAAP operating margin was 28.8% and non-GAAP operating margin was 41.6%. Return of equity (ROE: Net Income / Total Equity *100) of ZM is 28.26%, the price to earnings ratio (P/E) is 91.01, and net margin (net income / revenue) is 27.6%. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view ZM’s 2022 Q2 earnings here and their 2021 Annual Report here.
Zoom took off during the COVID-19 pandemic with the increasing need to communicate and host large meetings virtually. Many businesses and entities (e.g., schools) use Zoom frequently and have completely integrated the technology into day to day operations. Customer numbers grew from 2,278 customers contributing more than $100k, up 131% from the same quarter last year. Zoom is used by approximately 504,900 businesses with more than 10 employees, which is an increase of 36% from the same quarter last year. Although some companies are going back into the office, others have declared full remote work and remote work is becoming more and more common. Even as the COVID pandemic winds down, remote work appears to be here to stay.
Here are three points to support the bullish thesis:
Remote Work Here to Stay: According to Forbes, remote work trends seem like they are here to stay. Upwork conducted a survey that showed about 26.7% Americans will be working remotely in 2021 up from 7% in 2018. Many companies are going back to work but have kept some sort of remote work option while others have gone full remote and plan to stay that way. This benefits Zoom as the need for video conference services has already drastically increased and it does not seem like a trend but a change.
Network Effect: Zoom has an interesting network effect but it does not have one as significant as say CashApp or Venmo where in order to use the service you need to have you own account that the company can profit from. It seems as if Zoom needs to do little marketing because each of its customers that use the service set up Zoom send out meetings to clients and others which requires those to either familiarize themselves with Zoom or have the application on their device. Although not all of those customers will pay for Zoom, it will familiarize them with the program and the download of the application can benefit ZM in the future.
Outstanding Margins: Because Zoom is a cloud based platform and a software service there is not a lot of overhead costs. Zoom has outstanding margins of over 60% which is almost unheard of. These margins can help Zoom get recurring revenue with minimal overhead costs and will allow Zoom to continually get great cash flow as long as they are able to retain customers. There are other options out there and with more competition it is hard to see these margins expand but having 60% margin is nothing to hang your head about. This will allow Zoom to be a healthy company moving forward.
Here are three points to support the bearish thesis:
Massive Competition: Zoom faces stiff competition from massive competitors, including Google and Microsoft. Until 2021, perhaps the most notable competition came from Skype. However, the pandemic saw Skype’s market share deteriorate quickly as Zoom, Google Meet, and Microsoft Teams ate up market share. Whereas Zoom is almost entirely focused on virtual meeting technologies, both Google and Microsoft offer a huge catalog of other goods and services. This diversifies revenue sources for Zoom’s competitors and may provide them with a larger R&D budget, both of which should worry Zoom investors.
New User Growth Ceiling: As noted above, the pandemic led to a massive shift in how businesses and other entities conducted meetings. As companies moved to remote work and pushed meetings to virtual spaces, Zoom was there to meet the demand. Unsurprisingly, user growth on Zoom spiked during the initial months of the pandemic. However, this growth is not unlimited - there are only so many users to onboard, and Zoom may have reached that limit. With slowing growth, Zoom will need to find creative ways to monetize their existing user base (e.g., creating alternative revenue streams, developing new subscription-based features, etc.). This is particularly true given that two of their biggest competitors - Google and Microsoft - are well ahead of them in creating multiple revenue streams.
Potential for Demand Shrinkage: We mentioned above that remote work was here to stay. That may be the case. But there is also a possibility that companies will return to physical locations and virtual meeting platforms will become less necessary. Some entities - such as schools (at least in some places) - that relied heavily on Zoom throughout the pandemic have already returned to physical locations. Investors should keep an eye on remote work trends to see whether the demand for a virtual meeting platform remains at the level we saw throughout the pandemic.
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Have a great week everyone,
Brandon & Daniel
The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.