What is Zoom's TAM?

Longtime lurker (since Jan 2019) and occasional contributor of snippets here. Many thanks to Saul, muji, Gaucho, stocknovice, Paul Bryant, and many others from whom I have crowdsourced knowledge. I am on the verge of retirement now thanks to TMF and this board, and hope to contribute more often.

In another thread the captain said:

Don’t let the numbers scare you. Think “S” curve. Covid-19 simply expanded the teleconferencing TAM explosively. Try to figure out what the teleconferencing TAM really is and what market penetration has been achieved. Market penetration governs the growth rate.

A lot of my confidence in ZM this past quarter was due to Zoom Phone and entry into the PBX market, which I assumed expanded their TAM significantly. Zoom is competing in the much wider uCaaS space, which includes:

  • videoconferencing
  • PBX (traditional phone communications)
  • chat
  • filesharing

In the conference call, Eric Yuan positively gushed over the various use cases that were coming to his attention, but when asked which ones he saw as opportunities, he held his cards close to his chest. What came across loud and clear is that ZM is chasing the enterprise space with their “unified communications solution”. If ZM can deliver a cloud PBX solution which integrates seamlessly with their VC app, enterprises will be all over it.

So I tried to figure out the TAM this morning:

https://www.marketsandmarkets.com/Market-Reports/unified-com…

"… global Unified Communications as a Service (UCaaS) market size is expected to grow from USD 15.8 billion in 2019 to USD 24.8 billion by 2024, at a Compound Annual Growth Rate (CAGR) of 9.5% during the forecast period. "

This suggests:

  1. TAM is growing by 1.8B per year.
  2. TAM is 17.6B in 2020. If ZM revs are 2.5B this year, market penetration is 14%.

https://www.globenewswire.com/news-release/2020/06/02/204211…

“The global UCaaS market size is projected to reach USD 36.45 billion by 2026, thereby exhibiting a CAGR of 10.5% during the forecast period.”
“… USD 16.73 billion in 2018.”

This suggests:

  1. TAM is growing by 2.465B per year.
  2. TAM is 21.66B in 2020. If ZM revs are 2.5B this year, market penetration is 11.5%.

So let’s take a rough average and assume 2020 TAM is 20B and growing by 2B per year, so by 2023 it would be 26B. Let’s assume ZM rev this year is 2.5B and growing 100% per year. By 2023 it would be 20B, or 77% market penetration.

So it looks like there is room to run but not for too long. What optionality is there outside of the UCaaS space that would add to the TAM? Possibly customers who are interested in pure VC solutions, such as schools and small businesses, who already have basic phone solutions and aren’t going to implement a cloud PBX?

For schools let’s just consider the US. 3.7M teachers x $200/year adds 750M to the TAM. Not moving the needle much.

How about SMEs? I don’t know how to estimate the TAM for this.

Thoughts?

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2. TAM is 21.66B in 2020. If ZM revs are 2.5B this year, market penetration is 11.5%.

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So let’s take a rough average and assume 2020 TAM is 20B and growing by 2B per year, so by 2023 it would be 26B. Let’s assume ZM rev this year is 2.5B and growing 100% per year. By 2023 it would be 20B, or 77% market penetration.

I can’t vouch for your numbers but with 11.5% market penetration in 2020 ZM’s “S” curve is just getting into high gear. With 100% per year growth (not likely) the “S” curve is very compressed and 2023 could be the year to exit the position.

I would add that the traffic generated by Zoom is going to be a boon for Fastly and other access providers. Covid-19 is the coming of age of the WWW.

Denny Schlesinger

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I think this is a good estimate. And if everything remains static I will exit before 2023.

But what these exercises don’t take into account is what $ZM does with all the cash they have and with their stock? Their optionality right now is enormous. They can buy rivals, enter new markets, and release new products. It’s a really exciting time to watch a company like this.

I hope they do something brilliant and truly solidify their leadership position in SaaS. We shall see.

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Some high level thoughts:

  • I can’t see a date on the first article, but some comments are from 2016. Second article is from early June (when Zoom reported Q1). As the Captain said ‘Covid-19 simply expanded the TAM explosively’. Perhaps these articles are therefore out of date or are understating the TAM of ‘UCaaS’.

  • The longer Covid lasts the more entrenched Zoom will become, the lower its churn rate, the higher its growth, the greater its TAM. I see these as interconnected. In my opinion, Zoom needs to execute on its short term opportunity in the next couple of years, beyond that its TAM will only expand.

  • Just look at all the new use cases coming out seemingly every week for Zoom (touched on in the Q2 earnings call and my other post). This will only expand the TAM exponentially. I also second what GolfCaddy4PLynch said ‘they can buy rivals, enter new markets, and release new products’, although I’d see this as later down the line once Zoom has executed on its near term advantage.

  • “How about SMEs? I don’t know how to estimate the TAM for this.”
    I am not sure in relation to Zoom how you would define ‘SME’, and I wouldn’t know the TAM for this in the US (let alone worldwide). For my own company it would be businesses with <100 employees. Generally the total market for ‘SME’ is by far the biggest piece of the pie (there are a lot more small businesses than large ones). Therefore I was unsurprised to see Zoom’s mix shift to customers <10 employees (36% of revenue), because these are quicker to sign up, less ‘lead to cash’ time. While an ExxonMobil (another new win) might take considerably longer to woo, win and move over but deliver greater revenue contribution. Importantly Enterprise customers grew 112% in Q2, I only expect that to continue in coming quarters given the lead time.
    At a very high level now (talking base numbers, not revenue opportunity), for my own company, SME <100 employees is 99% of UK businesses, we would only have 25% penetration in to the UK market for SME but 85% for Enterprise. I’m not sure how useful that’d be in relation to Zoom, other that it will be quicker to reach market saturation for ‘Enterprise’ than SME.

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