ZM

[LifeOfDreamer]

ZM threads have me bored to tears.
I will tune in after they have an ER/CC to learn more.

In the meantime, I am much more excited about companies that have ER/CCs coming up over the next 4 weeks:

TWLO - first full Q with SEND in the fold, plus they have the benefit of adding SEND revenue without having to compare it to SEND revenue y/y, so they will likely have an artificially high growth rate…will be interesting.

TTD - always interesting CCs, and with progress made in China, Amazon’s growing ad bus, general body blows being landed on FB daily it seems, launch of Disney+ and continued growth of CTV…what kind of growth can TTD do this year on top of a $470m 2018?

MDB - what is Atlas growth, and will market finally realize that a lot of data needs to reside on-prem, so Atlas really isn’t the end-all-be-all in the MDB story?

ESTC - haters gonna hate…time for them to show if hypergrowth can continue, if lockup is a thing in the past, and if they use the words “use case” over 30-40 times, again, during the CC, showcasing the optionality of this company.

AYX - time to learn what the new normal in a post-606 accounting world is, in terms of revenue growth. They are opposite of MDB/ESTC in the sense they aren’t meant for developers and open-source community…they tackle the world of data with the enduser meant to be business segment owners or citizen data scientists. (Think HR dept wants to leverage data analytics)

OKTA - optionality seems to be the trend here…want to see it continue.

Nothing wrong with talking Zoom, but in comparison, I wrote a few posts about Zscaler IPO last Feb/March, and basically heard crickets. I find their business model, and target market, much more compelling than Zoom. Zoom isn’t a bad company, but even the CEO says the stock price is too high:
https://finance.yahoo.com/news/zoom-video-soars-16-billion-1…

Dreamer

[knyc]

Swift,

I have the same question and my understanding is that their cloud platform is specifically built to optimize video communications. In brainstorming this by myself, I thought they might be able to expand into VR-enabled communications once that technology matures a little, if their cloud platform can be further optimized for that.

I also see room for building partnerships with telemedicine providers, online education providers,legal service providers, online training providers, or any other “virtual consultation” type of business. That doesn’t directly address optionality per se, but if their platform is as reliable and simple as it seems to be, they could own the B2B and B2C virtual interaction space.

Kevin

[IRdoc]

So, valuation does matter. Is that the lesson here??

I wish people would stop using this phrase. Everyone wants to use it to make a point. “Valuation matters” is no more a lesson than “eating matters”. Nobody claims that valuation doesn’t matter. Valuation matters to everyone unless you are getting the stock for free. We buy stock at the current valuation so the price is relevant. We all want a lower valuation when we buy and a higher valuation when we sell. It’s ridiculous for anyone to say that it doesn’t matter or to suggest that someone who is buying a highly valued stock is saying that it doesn’t matter.

I believe that one should value different companies with different business models differently. Someone buying ZS at 30x EV/S isn’t saying that valuation doesn’t matter. They’d rather pay 15x EV/S. They just think they can justify the current valuation even though it is way higher than other stocks because of the CAP, growth, recurring revenue, profit margins, etc. Saying they would buy even if it was 20x or 25x or 30x isn’t saying that it doesn’t matter. They probably wouldn’t pay 100x. Someone else can agree or disagree, fine. Some want to say 30x is too high because other companies are valued at 10x or 5x or 1x. To each their own. But one who says 30x is too high isn’t alone in saying “valuation matters”. It’s just that the one who is buying at 30x believes the company is still undervalued or valued appropriately.

A company with no sales at all might be worth buying if the product is good enough.

[Aphalite]

I don’t own ZM, but why is optionality considered a desirable thing? Would you rather the companies you follow try to expand into many different services of which there’s no track record? or would you rather have a focus on serving its core customers and trouncing its competitors?

Over and over we’ve seen companies try to stretch itself too thin and offer too many products and have it hurt shareholder returns because there’s not enough focus. It’s equivalent to holding 20 different stocks in your portfolio, how can you possibly give each one the attention it deserves? It seems going into additional product lines more often than not signals that the company believes that it has or is about to exhaust its runway with the current product, so the move is out of desperation rather than foresight

As far as moat (why do we keep talking about moats in SAAS companies? moats are most effective for keeping what you have, not gaining market share to reflect the growth we’re seeking), eventually 1) legacy security firms will be attempting to develop cloud only solutions or 2) start up competitors with access to cloud computing (think Amazon GuardDuty or Azure ATP) with no need to have their own datacenters will start winning their share of the market as well. ZS deserves its multiple because of how it’s grown/executed in the face of all of the competition it faces, but if you think they won’t lose customers to new innovators down the line you’re acting as rational as the ZM IPO buyers you’re mocking.

Additionally, I think that over a long period time, ZM’s total addressable market will dwarf that of ZS. ZS is enterprise, ZM addresses both enterprise as well as consumer and small businesses, and it scales with number of users. A tutor or online teacher is not going to drop $300k on ZS products, but they will pay for licenses for ZM.

Return wise over the next year? I think ZS will outperform ZM because of the valuation that ZM has absorbed on its first day of training. But five years down the road I would be really surprised if ZS has a higher market cap than ZM

[Texmex]

IRdoc,

We are mostly in agreement except that I have seen posts stating that only business metrics like moat, CAP, TAM, growth rate, margins etc. should matter. Valuation metrics like EV/S don’t matter and are not part of the stock buying decision. Just buy the best businesses. Hence my comment.

IMHO there is a too high valuation even for the best stocks.

[XMFSwift]

I don’t own ZM, but why is optionality considered a desirable thing? …Over and over we’ve seen companies try to stretch itself too thin and offer too many products and have it hurt shareholder returns because there’s not enough focus.

You mean like Amazon (“on-line book seller”), Apple (“Mac Desktop Computer maker”) and Google (“Search”), Square (“Payments company”), MELI (On-line marketplace), etc, ect. etc…?

The simple answer is that companies that are rigidly focused on delivering on one product are more fragile and susceptible to being disrupted.

Here is a lesson in ‘why optionality matters’ from the great investor, David Gardner:

https://www.fool.com/investing/2017/10/30/9-self-evident-foo…

David Gardner: No. 2: I’ll just call it by the watchword we often use which is “optionality.” Principle No. 2 is basically that the best businesses are able to evolve. Why does that matter? Well, just like in biological evolution, changes in external circumstances happen and your organization needs to both be aware of those things and be adjusting itself to be relevant, and or successful, and or just survive into the next era by evolving. And one of the best ways that innovative companies manage to do this is often they have a second or third trick, and we call that, again, optionality. It means you have multiple possible futures.

The strongest business of our time, I think, is probably Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). Looking across all of Alphabet’s different businesses starting with Google – and then looking across the globe and seeing all the different places that it is doing its Googly things – that is incredibly strong and the optionality, there, is enviable. I hold that up even over something like Amazon or Apple, because I just believe that Alphabet is operating across more fronts and doing more interesting stuff than any other company in the world.

Now, very few organizations are going to be like that, and very few stocks that you and I will pick have that kind of resilience. As long as you understand the concept that just like in biological evolution it’s going to be really important when external circumstances change – the Ice Age hits – it’s going to be really important for companies to recognize that it’s getting cold, let’s say, and they need to stop doing this and start doing this other thing.

And the ones that can actually do that – that have the leadership, that have the vision, that have the strength to actually be able to implement those changes [and permission from the markets, and customers, and partners to evolve] – those are the companies that you and I want to own.

As an aside, here is David Gardner’s current stock picking record over two decades for the Stock Advisor service:

David 	        +570.6%
S&P 500 	+87.0%

Not bad!

Fool on! Swift…

[XMFSwift]

kncy,

Interesting thought regarding VR. That makes a lot of sense.

You Said: I also see room for building partnerships with telemedicine providers, online education providers,legal service providers, online training providers, or any other “virtual consultation” type of business. That doesn’t directly address optionality per se, but if their platform is as reliable and simple as it seems to be, they could own the B2B and B2C virtual interaction space.

Presumably, all of this opportunity is currently built into their TAM…Agree that they have a long runway for what their current platform offers. Just don’t know how they maintain a sustainable advantage. They have first mover status at moment (as they successfully disrupted the incumbents (webex, skype, etc) with dated platforms, but its not clear to me how they will outpace others over time. (I actually wouldn’t be surprised if this company was acquired sometime in future.)

ZM certainly does have proven, excellent leadership and technical chops. This alone may help them maintain an advantage over time.

Best, Swift…
No position

[IRdoc]

We are mostly in agreement except that I have seen posts stating that only business metrics like moat, CAP, TAM, growth rate, margins etc. should matter. Valuation metrics like EV/S don’t matter and are not part of the stock buying decision. Just buy the best businesses. Hence my comment.

IMHO there is a too high valuation even for the best stocks.

A single valuation metric is different from valuation. Sometimes, a given valuation metric doesn’t matter. For decades everything was valued based on P/E yet most on the board today would agree that sometimes P/E doesn’t matter. Establishing the value of a company includes the moat, CAP, TAM, growth rate, margins, etc. The bottom line is that you buy a company that you think will be worth more in the future, whether the EV/S or P/E or whatever metric is 1 or 100.

[foodles]

Optionality is a double edged sword, it can be good, or bad, for a company. It all depends on how well the company and their leadership implement it. For companies that do it right, it can greatly increase and extend (or even reaccelerate) their high growth period. For ones that don’t do it well, it can be considered “diworsification”, and be a time and money drain on resources that would be better used elsewhere.

Each company will need to be evaluated individually if they are able to use optionality to their advantage. NTNX for instance, came out with many new products that sounded like they are great products, but maybe didn’t train their sales staff properly to be able to handle selling the new products and has caused them at least what will probably be a couple quarter (or more) delay in their business plan.

Regarding ZM, I have no idea what their optionality will be, and whether they will be able to properly implement any such things they come up with. ZM seems like not enough reward to risk for me, I’m staying away for now.

[Texmex]

A single valuation metric is different from valuation.

You missed my point. I never claimed just look at EV/S.

The bottom line is that you buy a company that you think will be worth more in the future, whether the EV/S or P/E or whatever metric is 1 or 100.

But here is the issue. Many here might have bought ZM at $36 (p/s of 28) but did not buy at $62 (p/s of 48).

[stocknovice]

IMHO there is a too high valuation even for the best stocks.

In my humble opinion that’s the whole point. Where these threads sometimes get off track is investors always want to tie valuation to some specific measure (EV/S, growth, CAP, TAM, etc, etc, etc). The truth is there is no magic formula or someone would have found it by now. All investors have their own set of variables for determining whether a stock is under priced, fairly priced or overpriced. How they weight those individual variables is entirely their own prerogative.

When I see the inevitable “WELL HOW COME VALUATION MATTERS FOR ABC BUT NOT FOR XYZ?!?”, I often think the broader point is being missed. We all “value” stocks. It’s the basis of our buy, sell or pass decisions. Learning how and why others do that is the most valuable part of this board to me. Trying to point out gotcha moments tied to a certain metric or a prior decision clouds the discussion at best and borders on being intentionally disingenuous at worst.

Context matters, even for a company as seemingly ideal as Zoom. That’s what makes a market.

[knyc]

Swift,

IF, they can become the “It just works” version of video conferencing, that ease of use and simplicity alone could have them dominate the TAM. But I agree, I also see them as a likely acquisition. Think Slack + Zoom to dominate corporate communications (although I’m not sure who would buy whom in that scenario) or Microsoft buying them to replace their sub-optimal Skype product. Salesforce already participated in their IPO so I could see that tie up as well. One less obvious candidate might be Amazon - Zoom’s seamless experience fits in with Amazon’s customer ease of use focus, pairs well with their voice powered Alexa, gives them an entry way into the corporate market, and they could gain synergies by using their AWS platform to power it.

Kevin

[Aphalite]

You mean like Amazon (“on-line book seller”), Apple (“Mac Desktop Computer maker”) and Google (“Search”), Square (“Payments company”), MELI (On-line marketplace), etc, ect. etc…?

The simple answer is that companies that are rigidly focused on delivering on one product are more fragile and susceptible to being disrupted.

You are trying to make a point about “optionality” of businesses but then quote a Gardner speech that focus in on… Google, which has 99.5% of its revenues in 2018 from search. Doesn’t that prove my point?

Amazon the stock didn’t start making big money for investors until AWS took off (that’s its killer product, not selling books), Apple the stock didn’t start taking off until the iphone (still 63% of all revenue in 2018). Point is you don’t get outsized gains from spreading your attention all over the place, you find something that you can monopolize in the short term and expand like crazy with huge S&M spend. That’s the atmosphere of SAAS today. I’m looking at this from the perspective of a shareholder, looking for huge compound returns on my capital, not the board of directors or the CEO, looking to make long term strategic investment decisions (although you can argue that both perspectives are aligned with respect to the outsized S&M spend in the SAAS industry).

This board doesn’t really have longevity as a key trait in stock selections. I agree with you that if you’re looking at the long term plays like Gardner does (buy and never sell), then you’d want to look for businesses that can continue to survive and expand into different services. I would not recommend anyone buy the stocks from this board and then never sell. That is insane. If you are looking for a widow and orphan stock, you’re better off with a Coke or Johnson & Johnson. If you’re gonna bet on any of TWLO/AYX/ZS/ZM/etc. or the field over a long period of time (say longer than 5 years), bet on the field. But for the next 2 years or so? These companies have focus and don’t really need to expand into different services for huge revenue growth.

[Aphalite]

Correction, google is 99.5% of alphabet’s revenue, and advertising is 86% of total, so search/adwords is not 99.5% but 86%

[XMFBreakerTinker]

There are certainly lessons to learn. Amazon, as you mention, only became almighty because of the profits of AWS. No one, perhaps not even Bezos, has that in mind until they purposefully or accidentally hit on becoming the first mover public cloud. It is a natural fit for Amazon but almost certainly not in mind when Amazon went public. The expanded business case, leveraging the infrastructure and expertise is an awesome fit however.

Cisco was routers but now switches are its largest revenue source (last I checked). Moving to switches was and is a completely natural extension f routers.

Microsoft was Office and DOS and those alone were not enough to propel them but practically everything Microsoft does is leverage Office or leverage original DOS now Windows.

What they all did was hyper grow their core and then found avenues to leverage their market dominance into adjacencies.

Amazon was the first big cloud. It’s whole business is cloud. Going from cloud merchant to cloud enabler a natural extension.

I think that is the type of optionality. Not conglomerates but using their dominant core business to leverage I to adjacencies.

OKTA is huge at this. Elastic has this as their business plan. Zscaler is hyper focused on two products at present, the newer is recent. Zscaler has many adjacencies it can move into. Twilio is doing this as they moved from their basic messaging to higher valued packaged services. Mongo…TEAM…

You get the drift. Taking your core and leveraging it into adjacencies.

Amazon’s next high margin adjacency is advertising enablement like TTD and Google do. Amazon’s world’s largest group of merchants is an enormous point of leverage here. Amazon prime was enabled only because of the mass of unprofitable retail businesses. They laughed but Bezos saw the power in owning the eyeballs of the masses and their merchants.

Amazon appears to be the ultimate optionality creator. Close running w Microsoft and how it leveraged and continues to leverage the dominance it creates on the desktop computer.

Google…you are correct, nothing has worked much beyond their core ad business. Seems autonomous driving with Waymo is their big hope. But that is not really an adjacency like their cloud titan business is.

Anyways leveraging your core business to move into and dominate adjacencies. That is the optionality that has created the giants of modern time and we see this w so many of the companies we follow now.

Look at Nvidia. They took the GPU and turned it into the engine of AI world wide! Little crypto currency hang over not withstanding.

Tinker

[XMFSwift]

I think that is the type of optionality. Not conglomerates but using their dominant core business to leverage I to adjacencies.

OKTA is huge at this. Elastic has this as their business plan. Zscaler is hyper focused on two products at present, the newer is recent. Zscaler has many adjacencies it can move into. Twilio is doing this as they moved from their basic messaging to higher valued packaged services. Mongo…TEAM…

You get the drift. Taking your core and leveraging it into adjacencies.

Exactly, Tinker.

So bringing this back to ZM (so as not to create a OT debate about Google or the merits of optionality as an investing concept)…

For each of the companies you mentioned (OKTA, ZS, ESTC, TWLO, TEAM) it is not very hard to see or imagine how they will/are using their core business to leverage adjacencies (to use your definition of optionality–one I agree with); my question remains: can one imagine how ZM will leverage its current advantage in cloud video conferencing (its “core”) to become a more robust version of itself?

As you say well: Anyways leveraging your core business to move into and dominate adjacencies. That is the optionality that has created the giants of modern time and we see this w so many of the companies we follow now.

The only idea put forward so far for ZM, and an excellent one, is in VR space as it further develops. But that all seems a ways off. ZM isn’t a little start up, it’s a company with a $16B market cap. That we struggle to see what’s next for this company in terms of opportunities to build out a line of offerings and services, gives me pause as an investor.

My question stands and I’ll avoid ZM until I have satisfied myself with a clearer view of the durable advantage this company might have (or does not have)…

My goal, for my growth stock investing, is to try to find and invest in the up and coming “giants” of our time.

'Nuff said. Not going to beat the horse further. Especially since this thread is getting a little long in the tooth.

Foolin’ on! Swift…
Long OKTA, ZS, TWLO, TEAM, GOOG
No position ZM

[BenDubya]

It’s marketing 101. Focus on a specific market and dominate it before spreading yourself too thin. Once the market niche is yours, it’s yours unless someone comes along and disrupts you (e.g. a slightly better and slightly cheaper competitor isn’t going to steal customers away from you). Veeva is a current classic example. They’ve saturated their original SAM and yet maintain a high P/E. Why? Because of their reputation in their original niche market, they’re making pretty good inroads into adjacent.

Zoom? I think we want them to focus on video conferencing. They’re a measly 330million a year. 550 million revenue next year. They need to focus on this growth and muscle on in MSFT and webex, and take as much market share as possible before the incumbents catch up.

Then we want signs of them exploring adjacent markets.

Consumer market? Probably not much money made there, but a good marketing tool.

Data - if they catch the vast majority of video conferencing/chat made around the world, that’s potentially a lot of data they could use. I’m aware they already have a feature to automatically make transcripts in a number of languages. Are they using AI to improve on this? Natural voice communication with machines is something that will happen eventually. A good number of companies are trying to crack this. I know of one that’s looking specifically at navigation, in cars, with the goal you can effortlessly ask the car ‘navigate me to the nearest McDonalds with a drive-in and um, then I need to buy a new shirt, so a Macy’s or TJ Max will do, and then afterwards to Jim’s house, so find me the shortest route’

With all the voice and video, potentially they have some good data to work with. I don’t know. It’s all speculation. Much like NVIDIA and autonomous cars. It’s currently an educated speculation, sure, but the original thesis was continued growth in their core game and datacentre markets for a good number of years yet, before the new adjacent markets reached their own S-curve inflection.

[12x]

It’s one of the things I was wondering with ZM. I don’t see videoconferencing being a $42 billion industry. I don’t see what ZM currently offers being a $42 billion industry. Maybe if you add up every conceivable b2b communication such as internet phones, call centers and whatever else. But we won’t know how successful they would be there with new products. It becomes speculation to buy $16b Zoom and hope they can successfully enter new markets.

Heck even Nutanix brought new product offerings and created a buzz, but now that they’re widely available we’re not hearing one word about it. DocuSign just expanded into new markets before and after the signature and all we can do is hope it’s the new growth driver.

We can see this playing out with Twilio with their Sendgrid acquisition adding synergy and their new Flex product just released, ON TOP of the products they already have that just provided 70%+ growth. But yes, new products are the lifeblood of growth. Unless your original market is so huge (operating systems for Microsoft in 1990 for example). Then you may want to be a master of one instead of a jack of all trades.

This is one of the reasons I am in TTD. The advertising industry is huge and they are offering a unique solution.

[Darthtaco]

I was thinking that I’ve highlighted a couple of optionality’s before on Zoom.

Mainly inserting video and screen sharing into places that it hasn’t existed before.

I highlighted the Zendesk platform, where Zoom integrates into the Zendesk on a helpdesk call and with the click of a button the technician can start a video meeting with the customer. This integration also can make use of other parts of Zoom’s collaboration platform and do things like share the screen and files, etc.

So there’s at least one. Visual virtual helpdesk.

Are there other app platforms where a visual element could be useful? What about visual security authentication? Okta sure likes Zoom. Or how about visual virtual call center? Twilio sure likes Zoom. I could imagine a lot of uses in a platform like Everbridge or Pager Duty.

Many verticals in Education or Healthcare. I think those are going to be big players in the future of video communications.

I could sit here and go on and on quite honestly on so many areas where a visual communication would be helpful/desired. And think how easy it is today. A camera, a screen, and an internet connection. Plus a subscription to the service. No I think we are only scratching the surface. All we needed was a realistic platform to make it possible. No, the ones that came before weren’t there yet.

I’ll leave it to the individual to make a judgement on whether Zoom is that platform. I’ve made mine.

Darth

[XMFBreakerTinker]

In regard to taking dominance in the core product and spreading it into adjacencies, I recommend reading Smartsheets March earnings call transcript. The entire business is taking adoption of the core product and increasing use cases and creating solutions not just for different verticals but also specific use cases used by all verticals.

It is taking off virally and Smartsheet is on fire growing the platform and understanding the tremendous benefit of first mover advantage.

I do not know the size of their opportunity. Currently they have more Han 800,000 paying users and certainly the paying user base is much more than this. That is a big unknown. But assuming their user base is at least Atlassian in size then if you are looking for optionality into adjacencies, read their last earnings call.

There is some context to understand. As for example SMAR is not only selling its product to users, but also selling “accelerators” that come pre-set up for various universal needs such as Mergers and Acquisitions. Companies pay a premium for these accelerators.

Anyways, for whatever it may be worth to SMAR they are creating adjacencies left and right and increasing use cases at a rapid pace.

Tinker