Software Spending Set to See ‘Swiftest’ Recovery in Technology as Ranks of Remote Workers Grow, Goldman Sachs Says
…Zoom is the leading video communications platform, in part as its competitors have been unable to replicate the “viral user adoption” of its technology, Goldman Sachs said. Zoom is poised to hold onto a “material portion” of the new customers it signed up as a result of the COVID-19 outbreak as it continues to address their security and privacy concerns. Goldman has a sell rating on Zoom, which it said is solely based on valuation concerns. It foresees revenue reaching as much as $2.8 billion in 2021 compared with Wall Street’s consensus estimate of about $1.3 billion.
…Meanwhile, Okta ( OKTA ) is poised to remain “a clear leader” in the identity and access management market. “We believe security will continue to remain a top priority for investment, particularly as the overall attack surface expands with workforces and workloads increasingly distributed,” said the analysts.
Not sure if you need an account with Fidelity or MT Newswires to read the full article, but here’s the link from Fidelity:
…Zoom is the leading video communications platform, in part as its competitors have been unable to replicate the “viral user adoption” of its technology, Goldman Sachs said. Zoom is poised to hold onto a “material portion” of the new customers it signed up as a result of the COVID-19 outbreak as it continues to address their security and privacy concerns. Goldman has a sell rating on Zoom, which it said is solely based on valuation concerns. It foresees revenue reaching as much as $2.8 billion in 2021 compared with Wall Street’s consensus estimate of about $1.3 billion.
I assume Goldman referred to FY2021 here, if really ZM’s revenue could reach 2.8B, that’s 2800/622-1=350% growth and Goldman gave it a sell rating?
I’m not a Goldman’s client so I don’t know the reasoning behind their recent sell rating on Zoom. But I know GS recommended selling Zoom last year based on high valuations:
I did a bit of research on the Investars site – they list 22 firms with published ratings on Zoom. Six have buy recommendations, three are outperform, 12 are hold, and one is sell (CSFB). GS isn’t included.
More recently, Goldman is advising its clients to get back into the markets:
“While Goldman strategists expect a sharp near-term decline in global economic activity, they also forecast a V-shaped rebound in the second half of the year. Ardagna said her team has been “positively impressed” by the response of policymakers and while these measures won’t prevent a recession in the first half, they’ll likely fuel a powerful recovery.” https://www.bloomberg.com/news/articles/2020-04-08/goldman-t…
So my guess is Goldmans’s is advocating a return to equities in general, but recommending undervalued stocks that they feel are likely to bounce. But to be honest, I have no crystal ball into Goldman’s thinking. In the past I’d be spending hours scrutinizing analyst recommendations and estimates; but I recently re-read Saul’s 2019 Knowledgebase and his musings on the games analysts play, and his words hit me like a thunderbolt from the heavens. Nowadays I ignore the analysts, which has saved me countless hours of reading and worrisome pondering (thanks Saul).
I assume Goldman referred to FY2021 here, if really ZM’s revenue could reach 2.8B, that’s 2800/622-1=350% growth and Goldman gave it a sell rating?
The issue is not 350%… the issue is that 350% will not sustain…
even if you want to assume ZM will hit $5B in revenue in 2021 or 2022, that will include anyone and everyone who ever want to subscribe to Zoom has already subscribed at that point… so from that point, you are looking at low revenue growth after that… may be in 10% range at best… quite likely just flat or even declining…
and current valuation at ~$48B more than accounts for even $5B or $6B in revenue (even if entire of it is falling to bottom line) if the revenue from there is flat or declining. PS multiple market pays for low growth / flat revenue companies are in single digits…
unless ofcourse if Zoom finds more ways to earn revenue, for which there is scant proof of its ability to do so far.
I am no Zoom bear… I think the company has executed excellent, beyond anyone’s wildest expectations and become a backbone to WFM economy… even after pandemic effect subsides, it will do well…
Question is of valuation and in near term, I think the June ER will even pop the shares further… may be also in $200s… question is can the high P/S valuation sustain into 2021… if not, where can it land…
IMO, even with wildest assumption revenue growth this year, long term upside is not very high from current valuation.
even if you want to assume ZM will hit $5B in revenue in 2021 or 2022, that will include anyone and everyone who ever want to subscribe to Zoom has already subscribed at that point…
What if Zoom becomes an even more standard way for families and friends to communicate than it is now? What if people decide they like it so much they’re willing to pay $15/month (just like they are with Netflix)? Even 100 million paid users (Netflix has more) would result in $18 billion revenue each year for Zoom.
Then of course is the real cash cow: corporate. Not just companies paying Zoom for their employees to communicate between themselves, or to their customers, or vendors…but companies embedding Zoom into their telehealth solutions, education solutions, entertainment solutions, etc.
Then there are new verticals we haven’t even thought of yet. Or complete innovations. Maybe Zoom becomes a Youtube-like or podcast-like way for content producers to publish. Or something completely different. Think big. I’m sure you can come up with an idea or two.
What if Zoom becomes an even more standard way for families and friends to communicate than it is now? What if people decide they like it so much they’re willing to pay $15/month (just like they are with Netflix)? Even 100 million paid users (Netflix has more) would result in $18 billion revenue each year for Zoom.
To me, this is plausible but extremely low probability in the times when wahtsappp, google and plethora of other video call services are available for free…
we have seen a lot of chatter on “daily meeting participants”… not really seen any data point of non-enterprise subscribers…
Best I have seen so far is an article on SeekingAlpha where an author goes to extra-ordinary length to convince that ZM can monetize these users upto ~$500M / year by advertisement revenue…
Here is an idea - why doesn’t a ZM fan put this to a test.
Someone who has strong belief in this particular thesis for ZM success, create a poll on this board where we have large population of investors who can easily afford additional $15 / month spend to meet with their family over Zoom, specially in this pandemic driven shut downs…
Lets see how many actually has subscribed to $15 / month Zoom STRICLTY FOR PERSONAL USE and PAID PERSONALLY.
Pardon me if such a poll already exists. I would be really curious to know and happy to be proven wrong.
I appreciate the enthusiasm Paul, but I find it highly unlikely that a significant number of people would be willing to pay a subscription for Zoom, or any other video conferencing service for that matter.
I’ve already mentioned in previous threads how subscription based services for the general public are starting to get out of hand. We used to laugh at how expensive cable packages were, but how many people are spending just as much now, if not more, with their Netflix + prime + Hulu + Disney plus + other stuff. I’ve already seen several people I know start to cut back on these sort of things because it does add up over time. The average American is barely living paycheck to paycheck, there’s only so much room for monthly subscriptions before you start to bleed people dry.
I would agree. It’s hard competing with free. With products like facetime for families and friends to video chat without a cost, I would never pay $15/month.
On the enterprise side, it’s definitely possible for Zoom to be integrated into many platforms.
Zoom is a really cool product but I still don’t see a moat around what they are doing. User growth has exploded but the majority of users are not paying anything for the service and actually costing the company money. I look at services such as whatsapp that haven’t been able to charge even $1/year and I’m skeptical.
Think big. I’m sure you can come up with an idea or two.
Humans suck at making predictions,
“Who will ever need more than 64K” – Bill Gates
“There might be a need for five computers” IBM’s Thomas Watson Sr.
So don’t even bother. Que será, será, what will be, will be. But as you browse the headlines the word “Zoom” with a capital “Z” seems to lead the pack. Good news, bad news, it does not really matter. Being the most talked about Internet service is what counts.
There is one bit of news that is worth pursuing, how Zoom has responded to the early security problems. Had they been in denial Zoom would be toast. Zoom’s response has been masterful, a continuous stream of information about fixes and new features. As a result lots of institutions that initially banned Zoom are back.
How well will Zoom do? Will it be an escalator to financial heaven? One thing I can guarantee, volatility will not be banished. We can’t see the future but we can see the past. Here is what Amazon looks like, 20 years:
If you have a 20 year runway, what should you do? Buy ZM and forget about it. AMZN would have produced an average 30% returns.
Another point to consider, which companies are the biggest winners? Those that sell to business or those that sell to the public? What about selling to both corporate and retail? I must confess that I have never been this excited by an investment opportunity.
Think Big…or a podcast-type way for content providers to publish
Exactly! Have you seen the amazing content that TMF has been producing lately on Zoom? You can participate live or go back and view recorded content as time permits.
What about every other service adopting the telemedicine delivery model? Have you seen the number of tele-investment advisors popping up?
Think big is absolutely right. The opportunities to be created in the future by human ingenuity will be endless.
I can’t wait to Zoom my mechanic at the most opportune moment when my car is actually making that strange noise!
I’ve been reading all the Zoom chat and the one thing I am not seeing (sorry if I missed it) is an answer to the question of what is their moat? As far as I can see, there is nothing patented or proprietary in what they are doing. It seems like any of the big 5 (MSFT, FB, GOOG, AMZN, AAPL) could (or do) offer something very similar for free. If ZM has some nifty features that everyone loves, can’t the others just copy/paste?
I had a customer virtual meeting where they wanted to use MS Teams. I installed the app in 30 seconds and boom - I had a MS Teams video conference with them. Pretty similar experience to Zoom. (I will say, I have not used either very much, so maybe there are some differences I’m not aware of).
I will also note that there has been quite a bit of insider selling in ZM. I know, I know…“people sell for many reasons”… and all that. But still - it’s an indication to me that the ZM insiders think the price is “ripe”. Compare to insider selling for LVGO (very little - even after a 200% SP increase in the last 2 months) and see the difference. I would not make an investing decision on this alone, but it feels to me like ZM has run too far too fast.
I’ve been reading all the Zoom chat and the one thing I am not seeing (sorry if I missed it) is an answer to the question of what is their moat?
What is the moat in CocaCola, McDonald’s, Colgate toothpaste, Tylenol, Amazon online shopping, Google search… Anyone can make a soft drink, a burger, toothpaste, pain killer, an online store, and a search robot.
Seems like, Zoom was focused on business customers prior to the pandemic. The free option was there like the free version of anything in a freemium model business. So, suppose they now recognized that there was a huge potential market in consumers and so they diddled their pricing structure to introduce a layer between free and Pro, maybe $5/month or $50/year and lowered the capabilities of the free version so that some fraction of the consumer users would opt for the new version. Might be some non-trivial revenue there.
You are right that the number of streaming services are getting out of the budget for most Americans. Jeff Green (TTD) has been talking about this for years. He calls it streaming fatigue, and has been saying that the streaming services will eventually have to offer a reduced pricing option with ads or a free version with ads. I see this as more and more likely.
For the present, the answer seems to be that Zoom was designed for video from the ground up while the older services started out as one-way screen sharing at most. Hence the performance and the simplicity of use.
REITs: Coronavirus Killed Corporate Culture. Office REITs have been pummeled during the coronavirus pandemic amid mounting questions over the long-term demand outlook as businesses become increasingly more comfortable with “remote work” environments as reports surfaced this week that Facebook (FB) and others plan to permanently shift workers to work-from-home arrangements. Zoom (ZM) and “work-from-home” technology suites have emerged as the bigger competitive threat to the office REIT sector as more than half of the companies expect to shrink their physical footprint.
74% of respondents expect a permanent increase in remote work utilization.
Some argue they don’t have a moat. “I just click on a link and it works and then I’m done” they say. THAT is the moat. It’s the product. They are hiding all the blood, all the pain of videoconferencing and making it simple. Simple is not easy. If it were “easy” then ZM wouldn’t be known as the product that “just works”. Of course all the big tech companies are coming after them. They grew users by 200x in 2 months and had incredible margins at scale before Covid.
ZM is THE emerging product
Something that helped me visualize it … imagine you are 6 feet tall. Then in a month you grow 200x, now you’re the height of the Empire State Building. That’s a lot different than growing 85%, which isn’t even double. Will ZM monetize all those users? of course not. Will their margins come under pressure? yes. But they went from unknown to having the brand recognition of Nike, Amazon, Google, Coke, etc in 2 months.
As an investment does it make sense at the current valuation? We’ll find out. The future is too hard to predict
“What is the moat in CocaCola, McDonald’s, Colgate toothpaste, Tylenol, Amazon online shopping, Google search… Anyone can make a soft drink, a burger, toothpaste, pain killer, an online store, and a search robot.”
Fair. But how many of those companies had competitors that gave away competing products for free? I think that is the big difference here. I think MSFT and GOOG in specific will be able to give away competing products for free that are almost as good as ZM. I’m cheap - so speaking for myself, I would take the free option even if it was not quite as good.
We shall see. I’m rooting for you to make lots of $ - I just can’t get into this one myself.
But how many of those companies had competitors that gave away competing products for free?
Not only did Google’s competitors give away their products. It gave away its own.
I actually kind of chided the Zoom bulls (before I became one) because I thought Zoom’s valuation had gotten unreasonable. I said it was basically valued as if it would become the next Google. I can forgive myself for calling that unreasonable at the time, but with the numbers they’ve been running since I said that…it’s making me think twice.
Not trying to talk you into ZM, but I do think this is one where the future and the past look so completely different, surmising a reasonable market cap is currently impossible.