It’s reasonable to believe one thing about a company and another about its valuation. When Zoom came out at a PS ratio of almost 60, I was pretty sure it was going to continue to succeed as a company, but I was also pretty sure it was overvalued, because I don’t think the triple-digit growth rate is going to last long enough to justify the valuation.
Then they reported a great Q. About what I expected, 103% revenue growth. So my belief that they will continue to succeed as a company was strengthened. But my belief that they are overvalued was strengthened too. Especially as the market decided to bid them up even higher, peaking (for now) at a PS of 80!
I certainly don’t know that growth will come down to 90% or 95% next quarter, then 85% or 90%, then soon growth in the 70% range, 60’s, 50’s etc. That’s just how things normally happen as companies scale. And ZM already has more revenue than ZS, MDB, AYX, SMAR, ESTC, PLAN, etc. So rapid growth only gets harder from here.
I also am not able to pinpoint what the valuation should be right now if I’m correct about the above. I just know that 70 or 80 seems ridiculously high. If ZM had a PS ratio of 30, I would buy it in a heartbeat. I might even consider it if it was 40. But there comes a point where too much is too much. It would take 4 quarters of near-100% growth for Zoom’s valuation to come down from where it is to even 40 or so.
Maybe this is the one that will grow to 1B in revenue faster than SHOP did. I would love to bet that it is – but at this price you’re not getting any odds on your bet. Rather, you’re taking on the risk that it does what most companies do, and growth steadily slows over time. The only way you win is if the coin comes up heads the next 9 out of 10 flips.
I’m out for common sense reasons. Maybe that’s wrong, but I don’t have to win them all.