People think of business travel as airplanes. There is just so much more business travel happening in city streets. My wife has a small business with three employees. Even though she has three employees she works with a network of hundreds. Before the pandemic, she would spend hours each day inside of an Uber going from one meeting to the next. She is so much more productive now that she doesn’t have to travel across the city anymore to meet with people. She doesn’t see herself ever going back to that.
12 Likes
@TexasTitan, I’ve been in Tech for my entire career. About 4 years ago my company opened a satellite office closer to where I live, and I started working from the satellite office 2 days/week, and HQ 3 days/week. Within 1 year I went to 2/wk in satellite, 2/wk at HQ, and 1/wk from home. After 2 years the company expanded our HQ, closed the satellite office, and I went to 3/wk at HQ and 2/wk at home. We ran out of space again quickly, and the company acquired more space at HQ and started the renovation, but then 6 months before completion Covid hit, and the entire company went into WFH mode.
But, even before COVID we always had on and offshore teams, and always had multiple office locations, with engineers in the field or working from home or from consulting offices. Hence, even before COVID, everyone at the company was accustomed to using Google Hangouts for all meetings, Google chat to communicate with the team, even when we were sitting directly across from each other just 4 feet apart. The transition to WFH was nothing new to anyone in the company. The only exception were the sales teams, who were accustomed to making office visits with clients, and going to numerous conventions in every state. Ironically, we have been closing more business since COVID then before COVID, and our sales reps are spending way less money and have been able to reach prospects very effectively.
What our company has realized is we are more productive than ever before. I think it is mostly because people work longer hours since they don’t commute, and they don’t take long lunches or long breaks, and most have fewer disruptions (except those with kids at home).
Last month at our company meeting the WFH topic came up and the leadership discussed it openly with the entire company. There was also a survey sent out to gauge employee satisfaction re: WFH, and whether staff prefers to work in the office. The full survey results are still pending, but it is clear we are not going back to full time office work. The CEO basically didn’t want all the newly renovated space to go unused, but he committed that when COVID is done most of us will have the option to continue WFH or blended, depending on the role. Since most of the company are SW engineers, he anticipates 75% will WFH indefinitely.
With that context, I have spoken to several friends in the software industry, and some in other verticals, and most are very accepting of WFH. So the new era of remote working has come and will stay with us. Just this week I had job offer and right up front they company made it clear it would be 100% WFH, even though I would be leading a team of 50+. It’s just the new normal.
48 Likes
I realize that P/E is a somewhat antiquated metric for us :-), but I don’t think we’re far off from looking at ZM on a P/E basis. Look at the profitability…
Net margin expanded from 30% to 38% sequentially, and while they stated they expect R&D to ramp, that should be offset somewhat by S&M reduction. A 50% net margin (CRM territory), seems base case now, and not far away.
TTM P/E at close yesterday: 373 ($1.28 total EPS Q3 FY20 through Q2 FY21, $478 stock price)
TTM P/E at close today: 172 ($2.26 total EPS Q4 FY20 through Q3 FY21, $406 stock price)
Fwd P/E (worst case): 93
Fwd P/E (base case): 75
Fwd P/E (bull case): 62
Worst case: assumes Q4 revenue meets forecast, annualized ($811 x 4) net margin static (38%)
Base Case: Q4 revenue beats by 10%, expands by 5% over each of next three qtrs. Net margin expands 100bp per qtr, averaging 40%.
Bull Case: Q4 revenue beats by 10%, grows sequentially by 10% over each of next three quarters. Net margin expands 300bp per qtr, averaging 44%.
A lot of assumptions, obviously. My point though is that ZM was, and really always has, been in the fortunate position of being profitable, and soon will be massively so. This, I believe, puts a real floor on the sales multiple, and also gives them a fast-growing cash hoard for strategic acquisitions.
As I reread what I wrote above, even the bull case—-given what we saw in sequential comps against the prior COVID quarter, the massive growth in stickier enterprise customers, and the insane international growth——seems totally reasonable.
Eric
30 Likes
Couple points I’d like to highlight from this thread.
-
K-12 schools aren’t paying to use Zoom.
Kids returning to the classroom benefits Zoom’s profit margins. -
People seem to think Zoom is usage based. It’s not.
I agree with everyone saying hybrid WFH will be the norm.
When workers at colleges, businesses and government entities go from 100% via Zoom to 25- 50%, the organization will still keep the subscription.
WFH will also be a lot easier when kids are back to school.
-
International at 31% of the business is growing at 629%. That EMEA only grew 5% means there’s still tremendous opportunity.
-
Saul is correct. +301 new customers over $100k or +30% for the quarter is impressive.
Enterprise at 18% of revenue means this is another huge channel of opportunity.
I agree with LearningInvestor.
Relatively low penetration in corporate customers is exactly one of the big business opportunities and growth drivers moving into the future in my eyes.
- Bill makes an excellent point about customer support.
One largely untapped market is customer support. When all calls and chat and txts are done on the zoom platform. It could be technical support, where I share my screen with my app provider so they can debug a problem. It could be my bank, my insurance company explaining the EOB or why my rates went up. It could be instatcart asking if I’ll substitute whole milk for 2%, or asking me if the broccoli is acceptable.
Last year I had an issue with my company’s GoDaddy website. the issue turned out to be within my Macbook pro.
GoDaddy tech support, using Zoom’s technology, took control of my computer and fixed the problems in minutes.
I’ve shared screen via Apple support multiple times.
The GoDaddy via Zoom experience was quick and so much faster and more efficient than if I stumbled around following the tech’s directions.
- The $72 price drop today hurts. Have to remind myself that’s where it was two weeks ago.
Was hoping for a large pop, so I could trim my outsized position. Will be holding now.
I anticipate the reality of the overwhelming positive numbers from the conference call will start to seep into the consciousness of the market,
and over the next couple months Zoom will make a steady push upward in price.
That’s my hope at least.
30 Likes
Great discussion here on ZM and the #s from yesterday look very positive to me.
I’m long ZM. I think they are still early and have a lot more to offer - and become an environment and true communications platform globally.
That all being said, what do you all believe caused the -15% drop today after such earnings?
Simply analyst beliefs around valuation?
Overall market rotation…or something else?
I’m used to volatility with the companies we are in… but -15% is a big drop (in my experience) when such positive earnings come out.
Thanks!
Fwd P/E (worst case): 93
Fwd P/E (base case): 75
Fwd P/E (bull case): 62 – Eric
Your post was the most valuable one I’ve seen for a while (for me). I don’t want to get into any argument as to which metric is best, but… ultimately… when growth settles down… companies are frequently judged on PE. And you’ve made a compelling point that even on a conservative basis (PE), ZM is quite reasonably priced. Probably cheap. Thanks!
Rob
Rule Breaker Home Fool & STMP/MTH Maintenance Coverage Fool
He is no fool who gives what he cannot keep to gain what he cannot lose.
6 Likes
That all being said, what do you all believe caused the -15% drop today after such earnings?
More sellers than buyers!
From Jim Cramer:
First, I hate to break it to people, but Zoom had amazing numbers. Did they obliterate the estimates? Yes. Did they furiously raised their forecast? Completely. Did they reveal giant contracts that they stole from big enterprises? No. That led to a theory that its gross margins aren’t as special as they once were because they are handling lots of free smaller clients instead of going after elephants. Given how expensive the stock was, it could have been due for a fall. Darned stock is still up 500%. I just don’t think you can draw a conclusion that the work from home stay at home thesis has been destroyed by a company that has more business than it can deal with even as that business isn’t quite as lucrative.
https://realmoney.thestreet.com/jim-cramer/jim-cramer-a-grea…
Upthread LearningInvestor wrote, “Relatively low penetration in corporate customers exactly is one of the big business opportunities and growth drivers moving into the future in my eyes.”
Remember what happened to Fastly when they lost their top 12% customer? The focus on big customers is not always a blessing, Apple is doing quite well and most of their products are consumer electronics. For me an extensive consumer base is a positive development.
Cramer also said “Given how expensive the stock was, it could have been due for a fall. Darned stock is still up 500%.” In pictures:
https://softwaretimes.com/pics/zm-12-02-2020.gif
Anchoring is a bad idea. Fifty percent down is quite common for fast growth stocks and it has to be looked at in context. If you ignore the September-October peak, ZM is growing at a steady pace. Don’t forget that at the October peak Saul, myself, and others here took profits. So did many others and that created the top. This is normal for markets. Saul doesn’t like baggers but Y/Y ZM is almost a SIX bagger in one year $68.93 → $406.31. This is simply unreal.
That all being said, what do you all believe caused the -15% drop today after such earnings?
Don’t try to find simple “if A then B” type answers to the complex meanderings of stock prices, that’s not how the markets works. Look at the big pictures – plural – business model, earnings, stock charts, etc., etc.
Denny Schlesinger
TSLA did better $66.97 → $584.76, an 8.7 bagger. Elon Musk is catching up with Jeff Bezos.
ZM dropped to second place in my portfolio, just behind FSLY.
69 Likes
That all being said, what do you all believe caused the -15% drop today after such earnings?
More sellers than buyers!
I think we’ve seen this repeatedly. There is a cadre of traders who push the price of a high growth stock up just prior to an earnings release and then sell upon the news whatever it is. I think this was a major contributor to the 15% drop post the earnings announcement. Everything else in my portfolio fell about 5% on the same day which is a very normal fluctuation. The fluctuation in ZM, which is up 432% in the last 12mo (according to a Schwab bulletin) strikes me also as normal or at least to be expected. ZM is down 11% over the past 3 months… also normal
cheers
arnie.
2 Likes
Relatively low penetration in corporate customers is exactly one of the big business opportunities and growth drivers moving into the future in my eyes.
An entire generation is being trained on Zoom right now at school. Last weekend my 6 year old and her friend Zoomed because they missed each other. They spent the entire time changing who the host was so they could play a game drawing on the whiteboard. They learned this at school. My kids also Zoom with their friends while playing Roblox together.
My question is, what is an entire generation being trained on a product worth? Some seem to think this is not worth anything as it does not show up on the balance sheet. Some seem to think it’s actually a negative because it is causing the margins to shrink. These students will eventually join the workforce. Will they accept a lower quality product than Zoom when they get there?
50 Likes
I appreciate the insights from everyone and JTMatrix9 your email as well.
Many of you helped to confirm that a 15% drop isn’t unusual and doesn’t always have a logical reason to occur.
I’m long ZM as mentioned and in fact bought a bit more yesterday when it dropped at about -11%.
Thank you all for continuing to share not only the technical details about our high growth companies but also the mindset that we should embrace to be long-term successful investors with these game-changing companies.
An entire generation is being trained on Zoom right now at school. … These students will eventually join the workforce. Will they accept a lower quality product than Zoom when they get there?
Apple did the same thing with heavy student discount pricing and laptop/desktop placement in schools. Yet Microsoft stayed dominant, as it might with Teams for corporations. The people buying at many corporations don’t care about better, just good enough when a bundle deal is to be had.
It took revolutionary products like iPod, iPhone, and iPad for Apple to take off. Student pricing barely registered on their bottom line, in my view anyway.
7 Likes
Smorgasbord,
I agree with your caution. However, I was in school during that time period. I don’t remember what kind of computers schools used. The computers were in the computer lab, not the Apple lab. I remember learning MS Word, Excel, and PowerPoint. This was an essential skill for all jobs I was looking for when I left school. I would say this was more of an advantage for Microsoft than Apple.
Will being proficient in Zoom be like being proficient in Excel to employers? If Zoom can continue to innovate faster than Microsoft, this could be a reality. If I was hiring now, I would want any new hire to be proficient in the best video conferencing tool. College students are probably doing group projects and presenting in class on Zoom. They are proficient.
Of course, this is not reality yet. It may never register on their bottom line.
1 Like
If I was hiring now, I would want any new hire to be proficient in the best video conferencing tool.
This isn’t a thing. If you’re a regular consumer, you just download the app and start, click or tap a couple of buttons and you’re done. If you’re in a company where Zoom is installed for you, you just click it and go. If it was any harder that, Zoom wouldn’t have turned into a verb overnight; I daresay anybody who has trouble with that is barely able to use their phone to make a call 
Software proficiency is sticky in only a few cases, and Microsoft has the majority of that sewn up.
The moat here can look like a fragile thing, a combination of ease of use (both for the consumer and IT departments who manage it), pricing, a robust user base that attracts more users, and performance…in short, execution. If it were easy to do, Skype would have owned the space already, since they were one of the first; or Webex or Teams would make it impossible for a small player to squeak onto the field. But execution is NOT easy, even if sometimes the right team can make it look that way.
8 Likes
If I was hiring now, I would want any new hire to be proficient in the best video conferencing tool.
The point about Zoom is that you don’t need proficiency to use it. It just works. The point about former students who have used it extensively coming in to the workplace is that they will know how much better it is possible to be.
3 Likes
The computers were in the computer lab, not the Apple lab. I remember learning MS Word, Excel, and PowerPoint. This was an essential skill for all jobs I was looking for when I left school.
This isn’t what I’m talking about, and as others have pointed out, there is no real Zoom skill.
Even for Apple, it wasn’t about getting skills using Macs, it was about exposing people to the better solution, so when it’s their turn, they won’t follow the lemmings off the cliff and buy Apple instead (intentional Apple TV ad metaphor). Zoom may be trying to expose people to their better solution so they’ll buy it instead of the others later.
As I said, it’s fine but doesn’t really move the needle appreciably.
1 Like
Hi Eric,
I agree that folks should start looking at Zoom on a P/E basis.
Could you clarify where you got your margin percentages?
I see a 37.4% non-GAAP operating margin for the third quarter, which is up from Q3 last year of 12.8%, but down from Q2 FY21’s margin of 41.7%. (Due to Zoom ramping up spend).
Also, I am wondering how you are getting to 50% margins in the future. At Zoomtopia, Zoom’s CFO Steckelberg guided for long run non-Gaap operating margins of 25%.
(Are you just assuming that at some point they’ll be able to shave percentage points off of S&M and G&A as they scale?)
-Purplemist
1 Like