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Is Zoom Really Worth $19 Billion?

Last Updated on May 14, 2019 by Kevin Douglass

In this article I will discuss the following

  • Zooms valuation & Finances; is 19 billion fair?
  • Competitive landscape
  • Risks to investors
  • Other current opportunities for gains

Background

Recently we covered Zoom’s IPO and argued there was a potential play in the IPO due to all the hype around it. Since their IPO, shares have risen an astonishing 100%+, raising the question of whether this valuation is reasonable or not.

Zoom (not to be confused with the ticker ZM) is a video communications company that utilizes cloud computing. based out of San Jose CA, the company is led by Silicon Valley heavy hitters such as CEO Kelly Steckelberg. The company posted some impressive financial earnings, designating them as a “unicorn IPO” for 2019 with a year of profitably under their belts. Although their growth was impressive, investors can’t stop questioning whether they were $19 billion impressive or not.

19 Billion Valuation?

Zoom’s year of profitability was impressive on many measures. They booked just over $330 million in 2018, a 100% increase in a yoy (year over year) measure when looking at 2017 and 500% compared to 2016. Although these numbers are incredible, are they sustainable? A huge part of the unfathomable valuation is clearly in this key selling point of revenue growth, but can they continue to outperform by such a margin? Speaking of margin, this is where the story gets a little bleaker. While the company posted impeccable revenue growth, it seems to have been at the cost of their margins. While revenues are important, margins are critical. If your business isn’t profitable, why continue to run it? Zoom has experienced roughly 10% operating margins and worse when looking at varying years. While this number is concerning, the company was able to produce 80% gross margins, restoring a little faith for investors. This blow to margins is primarily caused by account acquisitions costs such as marketing. With the company now having to answer to its various stakeholders, it would be irresponsible to not pay attention to their variance in these costs. To remain competitive in a highly substitutable market, Zoom will need to properly budget to remain consistent with its revenue. With players such as Skype gunning for the same users, expenses will be sure to make up a significant portion of revenue for the foreseeable future.

While I believe Zoom has made some impressive strides in proving their viability in a competitive market place, their current valuation has me scratching my head. Critics were skeptical of their decision to raise the IPO in the $35 range, so how is it pushing towards $100? Personally, I enjoy using Zoom and believe they will do well as a company, but $19 billion? That’s a bit too high for my liking. A look in the past at their competitor (Skype) reveals an interesting story on valuation. Skype was purchased by Microsoft who argued the acquisition was in efforts to better position their PCs and fulfill the end to end experience they wished to provide their users. This came at a high price to Microsoft who purchased it from eBay at 32x Skypes operating profit. This brought the deal in at $8.5billion and was considered too much by critics. This price tag was largely do to a defensive motive on Microsofts part as they wished to keep their competitions at bay (Google, Cisco, etc).

Source: WSJ

Competition

Although Zoom has had impressive user acquisition, competition remains hot on their heels. A simple google search reveals the competitive nature of this market with over 20 immediate results all owned by the likes of giants such as Google, Cisco, Microsoft, etc. The more prominent competitors to Zoom are best viewed as but not limited to Skype. As discussed above, Skype has a large stake in the video conferencing business. With the massive funding of Microsoft, Zoom will have to put up massive dollars to remain relevant and compete with the preexisting giants. This is something they have successfully done thus far, but current headwinds to the tech industry may significantly risk this positioning. Many of Zooms competitors operate on the premise of attaining market share, being disruptive and then quickly being bought out. It’s what Skype did and countless other tech startups, but how will Zoom be purchased at such a high valuation? Consumers remain loyal to their device family, should Apple significantly improve their FaceTime portfolio or other offerings, Zoom would have yet another behemoth to go toe to toe with but with fewer dollars backing them.

Risks

With the illogical hype around the trading of this equity, it very well could see runs to the $100 range as retail with little education on the matter of valuation inflates the price. In addition, investors need to be cognizant of a potential rally if a trade deal is met between the US & China. The current escalations in this field of suppressed many tech companies and the markets in their wake. It is reasonable to anticipate a run that would extend to the likes of Zoom should a deal be set into place between the two countries. Supporting evidence can be seen for this in actions such the Bitcoin pop or the more salient recent run of ticker ZOOM.

This company ran 56,000% on the incorrect assumption that this ticker was somehow Zoom video conferencing (ZM). With such a massive volume being misplaced on an incorrect ticker, logic is clearly not at play. With this in mind, it is only a matter of time until the true fundamentals take over as they always do. Numbers don’t lie and $19billion is a misalignment when it comes to the companies current valuation based on the previous purchase of Skype, Zooms revenues and other factors which place a proper valuation much lower.

Other Opportunities

The recent pullback ignited by trade tensions has placed many equities “on sale.” Although these tensions are of massive concern too many of the equities we all watch as investors, some sectors and companies are being unfairly punished. Biotech has little impact from the implications of tariffs, or at least many of the individual equities do, yet the market has punished them to an extreme. This punishment has extended beyond logic and fundamentals in many areas. ADMA, the equity we have done extensive research in the past has recently received FDA approval of BVIGAM as we anticipated in this article. Pre-market after this announcement, shares flirted with the $6 range, up over 20% from the previous close, but found themselves red at the close. This came on the heels of extreme punishment from the broader markets, largely wiping out gains for the previous quarters.

Closing Thoughts

Zoom is a solid company. They have largely proven themselves in a challenging market and have a lot to look forward to. Although there are many positives with Zoom, a $19billion+ market cap should have investors cautious. The tech sector is experiencing headwinds which haven’t yet been sufficiently answered which greatly threatens Zooms revenues, a key component to the hyperinflation of their stock. Aside from the broader sector outlook, Zooms valuation should be viewed as lofty when observing their value versus revenue. These numbers simply aren’t backed by logic when observing the current premium. Along with these factors, investors would be wise to pay attention to Zooms margins moving forward. The key to their prolonged success will lay within their ability to efficiently action their massive investment on account acquisition.

While Zoom and other tech plays may be exciting, they are not always bullish at IPO. The current market reactions have created a multitude of buying opportunities at a significantly decreased risk positioning. My eyes will certainly be on the equities which are currently presenting themselves as on sale and with significant upside not priced in.

I am/ We are long on ADMA




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