Value ZM on FCF multiple: cheap

ZM annual FCF run rate about $1.5B so EV/FCF is about 68. ZM will grow revenue at around 50%+ this yr. Comparing this valuation to CRM when CRM was growing revenue 25-30% (2014-2018), $CRM had a EV/FCF multiple range of 30-50. ZM seem like a strong buy to me.

At this point, valuing ZM on a FCF multiple makes more sense than trying to value it on EV/Sales. FY22 revenue growth guidance is 43.6% which the company will probably raise 3x (after Q1, Q2, Q3). Growth will likely be 50-60% for FY22.

I keep hearing that ZM is a WFH stock. I disagree. It’s a work from ANYWHERE stock. I think Zoom Phone adoption will accelerate strongly as employees head back to the office. This will support revenue growth in FY22 (current year) and FY23.

While OnZoom’s future success is still an unknown, I look at it as a free roll opportunity that could help keep revenue growth strong in FY23 and FY24. But I think substantial OnZoom revenue in FY23 will be unnecessary for stock to do well.

Overall, I was very happy with ZM Q4 results. The high guidance and the Zoom Phone traction are VERY encouraging. I’m keeping ZM a large holding in my portfolio. ~12%

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What’s the sales multiple ZM (and others-DDOG,NET,CRWD,ZS, MDB, etc.) are trading at? Doesn’t matter because whatever they were the market is saying they were way too high with what is going on in the bond market. Every day yields spike these stocks tank and have weak bounces when the yields pullback some. Earnings results don’t even matter right now. what is going on with interest rates/yields do. Sales multiples are getting slashed across the board independent of how these companies are preforming. I don’t think we will ever se multiples (NOT stock prices) like that again.

Bnh

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As Beth Kindig pointed our recently, tech stocks have performed very well throughout this bull market with a higher 10-yr rate than we have today. This is likely just short term noise/pressure - our growth stocks are having an amazing earnings season. Short term blips and volatility are the price of admission on the way to riches in growth stocks, see 2020 as a great example. I guess the trading bots (algorithmic trading) didn’t read the earnings reports, AGAIN.

https://twitter.com/Beth_Kindig/status/1364990602496995328/p…

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can there be an argument made for very high growth businesses being less impacted by a steepening of the curve?

If the business growth is high ‘enough’, the stock could still have ‘good’ growth over the period. Maybe it helps if they can generate good cashflow and re-invest some of that but there is going to be some general headwind with the increase of longer term rate on Companies that need more investment monies like it is the case for many of those discussed on this board. If the business is compelling longer term, maybe that would not be such a problem.

In the shorter term, several of the companies discussed in here could help the re-opening and get their ware into a new normal so they may do well.

tj

“I think Zoom Phone adoption will accelerate strongly as employees head back to the office. This will support revenue growth in FY22 (current year) and FY23.”

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.

With regard to ZOOM Phone: Pagers went in the toilet a long time ago, but most of us just like our personal cell phones. We have apps on the phone like TigerText that allow secure messaging. We do have hospital VOIPs (portable phones), but those are following the pager path into the splash bucket.

I don’t know that the healthcare environment is the best barometer for ZOOM going forward – I know their market is the business and financial world – but I gotta think that many non-healthcare businesses will have some percentage shift back to the office (downward pressure on ZOOM) and will realize that the free “good enough” solutions are close enough in quality to eschew paying for ZOOM (more downward pressure). I also am leery of assigning a whole lot of hope to ZOOM revolutionizing decades-old telephone technology when we’ve already got something much more personal in our pockets, with wide availability of apps to eliminate the only weakness of that modality (security/confidentiality).

I’ve chosen to reallocate away from ZOOM.

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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.

This doesn’t really say anything. Exactly what is to much? More than a Pbx or Key system that most hospitals have? I can’t believe it is more than that. Give us a number so we can kick this around. There are just to many variables to help this in my investing thesis.

Andy

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Hi Andy,

I completely understand. I don’t have the actual number.

I think for some investors, though, it is a small-sample-size glimpse into at least one organization’s response to the question of whether when the COVID pressures modulate, does Pandemic-era wide adoption translate directly to monetization? They made mention of large gains in their sales to companies with less than 10 employees, but here I’m pointing out that at least this business (as the hospital here can certainly be considered) with > 10,000 employees didn’t see sufficient value to pay for the service (or advanced features) beyond what is available for free.

For my investing thesis, it doesn’t matter whether the cost was a lot or trivial; the point was a failure to monetize here and the inference that the gap between ZOOM and “good enough” wasn’t large enough, superimposed on my doubts about their bet that a propriety cloud phone will be preferred over the one we have in our pocket, at work or otherwise.

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.

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Only after I posted did my mind wander back to their last earnings call and a bit more light on how much growth might still be under the hood. Here’s the interaction:

Zane Chrane

“Hi, Kelly, thanks for taking the time. I was wondering if you could explain to us what portion of business customers are on the active host pricing model versus a named host pricing model? And why do you make that distinction? What does it mean for you in terms of strategy, adoption, overall growth? And then I have a quick follow up.”

Kelly Steckelberg

Sure, hi, Zane. So in terms of the approach, and why we have active hosts versus named hosts is because it allows customers that aren’t sure exactly what their uses are going to be, to come in and buy Zoom at a level that feels comfortable to them, and then grow into that. So it’s a very effective mechanism for maybe somebody that’s newly adopting video communications, or expanding and extending it to a part of their organization that may not have used it before. And it’s a great way for them to have the opportunity to assess what that level of usage is going to be.

In terms of what percentage comes from that, that’s not something that we disclose. It’s really a mix, depending on the customer segments, and how those customers want to buy.

Zane Chrane

That’s helpful. And as far as the customers that are on the active host pricing model, how long is the lag? Or how should we think about the relationship between revenue and usage? Is it a one month lag between monetization versus usage? Is it a quarter? Is it a year? How should we think about that in general?

Kelly Steckelberg

Yes, so the active host model is most prevalent in our up market customers. And the typical structure – of course, again, we’re focused on delivering happiness to our customers. So these are all things that are negotiable. The typical structure of a deal would be, they would have access to a certain – a set number of licenses. They would pay for some fraction of that for the first year. And then after a year, we would look at where their high watermark was of usage for those hosts. And that would be their true up then for the next year.

Zane Chrane

So should we interpret that as meaning customers that have not hit that one year anniversary? Those may be in Q1 or Q2, that have expanded significantly in the last year, we should still see improved monetization of those in Q2, Q3 next year maybe?

Kelly Steckelberg

There’s absolutely the potential in that scenario, that yes, there’s a step up for those customers if they’ve expanded through where we started them in their minimum commitments at the beginning of their contract. Yes.


The reality is that we just don’t know how much of Zoom’s saturation is showing up in their revenue right now and how much is slowly working its way through corporate decision making.

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For my investing thesis, it doesn’t matter whether the cost was a lot or trivial; the point was a failure to monetize here and the inference that the gap between ZOOM and “good enough” wasn’t large enough, superimposed on my doubts about their bet that a propriety cloud phone will be preferred over the one we have in our pocket, at work or otherwise.

Here is my problem Rob, I worked in the Telecommunications field. The people looking at the numbers are incorrect. To run a pbx with 10,000 employees is exhorbitant versus Zoom. With 10,000 employees you would need at least 3 people working on the Pbx. That is 3 people with salary, medical, 401k, and vacation time. That is just for the people, then you have the cost of the pbx and having to have hardware upgrades and software upgrades. Let’s say the technician cost is 100,000 dollars a year, so that’s 300,000 a year, The PBX is 5 million, ( that’s cheap) you can depreciate that over 1 year. Then you need a power back up system for the PBX, yes I realize that most hospitals, and assuredly a hospital that employs 10,000 people would have a back up power system. But if they were professionals they would want their PBX system on its own back up power. All of this, and the training ands onto the cost, where Zoom would handle all of this for you. Yes you would need back up power for their phone system but a much smaller back up system.

That is why I am asking you Rob how much it would cost. Maybe the people at your hospital thought it was a great idea writing off a new Pbx system because the tax law allowed them to depreciate the full price of the pbx system in one year. Maybe they are willing to pay 300,000 a year for technicians to maintain the system. Over all it really doesn’t matter because we all know people that make poor financial decisions and this also includes people with CPA behind their name. One thing I am sure of is that Zoom would be much cheaper than what your telecommunication department decide to go with.

Andy

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Hi Gaucho Rico,

Thanks for the post. I just referenced this metric while discussing Zoom on another website.

The person disparaging Zoom was bullish on Tesla. In the recent earnings call, Elon Musk highlighted Tesla’s $2.8 billion in FCF.
Zoom’s $1.5B in FCF compares impressively.
While Tesla is widely known as an insanely expensive stock, should their market cap be 6x Zoom’s?

Eric Yuan said, “We’re not only a video conferencing company anymore.”

He’s correct. They’re a communication platform, money printing company.

Trying to navigate the market right now has been difficult. I’ve struggled to make sense of various selloffs.
IMO some of the negativity towards Zoom may be related to people suffering from pandemic fatigue.
The company’s numbers and performance during this extraordinarily trying time have been exceptional.

Sequential quarterly revenue grew by $105.3 million.
Customers> $100k grew by 355 or 22% last quarter.

Regardless of reopening plays and rising interest rates, I remain confident Zoom will continue enjoying exceptional growth and the investment will be rewarded in the long term.

Thanks again.
JT

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Then suddenly, Facetime was “good enough” and that’s been the standard for video communication since.

And if you are an Android family, you are just out of luck?

Hospitals are, in my experience, terrible at staying on top of technology and extremely good at making short sighted decisions. It’s true, FaceTime is probably good enough and leave the nurses to figure out how to connect people who don’t have an iPhone. They could still use free Zoom. Or just use the phone or have the patient figure it out. But hospitals routinely use obsolete software or whatever is cheapest. We had one hospital plan for this major server upgrade, buy a bunch of computers, then decide to fire the person who would have done the upgrade and leave the computers in storage for a few years, despite being constantly told that the old servers are affecting patient care.

For staff meetings where the staff or doctors request Zoom it makes more sense but we have some who insist that calling into a conference line is good enough. And then they spend significant amounts of time asking if someone is on the line or dropped out. Point is that using a hospital to gauge the demand for tech is not a good idea.

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ConorDot,

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!

I’ve been thinking about this too but I’ve haven’t thought about it deeply enough yet to model where FCF might go going forward. However, some things to consider:

  1. ZM had a quantum leap in business last year and then grew from there. After the quantum leap could we really expect growth to continue at that pace? I think not. While ZM managed to meet the demand, how in the world could we expect ZM hiring of employees to keep up? So ZM’s FCF was higher because ZM couldn’t hire fast enough and they’re likely now “backfilling” or catching up with hire. Going forward I would expect this to be a drag on FCF.

  2. When business surged last year, ZM had to pull out all the stops to get video conferencing capacity up to a level to meet demand. They had to utilize cloud vendors to met demand rather than using their own resources. I imagine that this was expensive and inefficient which would have hurt FCF. Also they had to build out which also hurt FCF. I would expect efficiency to get better and better which should help FCF going forward.

  3. ZM gave away a lot of free accounts to education. I think they still are doing this. This adds costs for which ZM is getting no revenue. Eventually, ZM will charge schools which should help FCF.

Not sure how this all balances out but I’d guess that in the long run the future FCF benefits of #1 and #2 will outweigh the lowering of FCF caused by #1.

GR

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