Gaucho Rico,
I appreciate this way of thinking about it – thank you! I share your optimism about Zoom’s future and also hold it as a top position.
I do wonder though if Zoom’s current FCF figures aren’t a bit distorted by their explosive growth. In other words, will their FCF actually shrink a bit as they let their R&D and sales functions catch up with their new size? Did Salesforce, during that time, perhaps still have greater FCF growth to look forward to than Zoom does? At least in the shorter time span.
Zoom’s FCF skyrocketed back in Q1 but has stayed pretty stable since Q2 despite increasing revenue. I’d be suprised if it keeps pace with revenue growth in 2022. I’d even like to see them hold it steady as they invest in future growth!
Considering very different expectations for FCF growth in the short term, I wonder how well we can compare the multiples.
Quarter Q320 Q420 Q121 Q221 Q321 Q421
Revenue 166.6 188.3 328.2 663.5 777.2 882.5
FCF 54.7 26.6 251.7 373.4 388.2 377.9
The other caution I have to keep reminding myself is that they are practically guaranteed 33% YOY growth if they just sustain their Q4 exit revenue rate. Considering ANY growth is adding onto a base of 33% growth, I agree with you that they’ll remain in above 50% growth through FY22. I found their guidance frustrating for this reason – I’m concerned that their guidance is for only 2% growth QoQ (902.5 / 882.5), which is less confidence than they showed in Q2 or Q3 (both were for 4% over the prior quarter). The math to get that guidance must include a tremendous increase in churn or just no new customers.
I’m loathe to dismiss it entirely, but I do think it can be written off as excessive caution in the face of the upcoming reopening. They’d look awfully foolish if they weren’t conservative enough. I can’t really fault them for that, but when it’s juxtaposed with my own beliefs about their outlook, particularly with education coming online at some point, I’m left quite optimistic that we’ll see them beat Q1 guidance by more than the 9% beat they did in Q4.
From Robworldwide:
“We have been using ZOOM extensively in the hospital (at least we did, more below) because we can’t have visitors for the patients during COVID. It’s been especially useful in the ICU where the nurses can hold the tablets up to view the patient and stream back an update to family members. About 6 weeks ago, admin got nervous about continuing to rely so heavily on the “free” version of ZOOM. They decided to pursue an enterprise license because it was a superior product to all the others… until they heard the pitch from ZOOM about the cost of a legitimate enterprise solution. Then suddenly, Facetime was “good enough” and that’s been the standard for video communication since.”
Robworldwide, thanks for your post – I do think it’s helpful insight in a number of ways. First, I can’t help but note that the concept that such a heavy use case would only now be considering converting to premium could be an indicator of the opportunity that lays ahead for Zoom – how many free instances occur every day that might consider transitioning to paid even now?
In the same vein, Zoom’s growth appears to have so far been in the lower employee count sector of their business. Their growth in customers looks much different in the >100k sector:
Quarter Q320 Q420 Q121 Q221 Q321 Q421
Customers 74,100 81,900 265,400 370,200 433,700 467,100
Cust Count Gr. % QOQ 11% 224% 39% 17% 8%
Cust Count >100k 546 641 769 988 1,289 1,644
>100k Cust Count Gr. % QOQ 17% 20% 28% 30% 28%
I think it’s a valid concern that Zoom lacks the flywheel that so well illuminates the future growth of Crowdstrike, Datadog, Cloudflare and others, but I wonder if it’s future growth isn’t being telegraphed in its enormous tail of smaller customers – many of which could be departments or units within organizations that are otherwise on teams or webex – and its unfaltering growth in the large customer segment. The company has ran a Net Expansion Rate of >130% for 12 quarters now I think – I’m inclined to wait to sell until I see weakness there. If they can maintain an NER like that for their 2020 customer cohort then there’s really no end in sight to their growth. How many instances of “okay, we’ll add a couple more seats” are still in the pipeline as it becomes clear that coordinating logins or invites is just not economical compared to the cost. Or organizations that look around and find departments are spending their own budgets on Zoom licenses and what if we moved the whole org over and consolidated our phone system.
I consult maybe 10-15 hours a month and I signed up for Zoom sometime in 2019, but it’s only been recently that I’ve started to consider paying for cloud storage for recordings as I find it’s tremendously beneficial to me to be able to jump back to a recording if my notes were insufficient. That would more than triple their revenue from me!
I intend to hold on too until it’s clear that their growth won’t maintain above 50% – I see the risks of letting go while Zoom articulates its next moves and upcoming growth opportunities as much greater than the risks of staying in when, to your point, the floor of value is just not that far below it’s current valuation.