Zoom - A Thought Experiment

Saul recently wrote about a thought experiment where Zscaler climbed to a valuation of 100x sales.
We have a real life scenario in ZM to think about today. It may not parallel Saul’s experiment exactly as none of us have ever had the chance to buy Zoom at a lower valuation. But it is worth considering.

Would you buy Zoom at 49x sales? I haven’t crunched the numbers but did read that number here.


Now, if Zoom doubles sales this year, the valuation will halve assuming no stock price movement and ignoring dilution.

Based on the metrics I’ve seen, I can certainly see why they are valued higher than everyone else. We are halfway to a theoretical 100x sales here. I can’t see a ton of alpha at this point, but still reserve the right to change my mind. 49x sales just seems too lofty.



49x sales just seems too lofty.

While I’m not going to argue with that point, I think the really compelling issue is that … despite some very nice recent growth from a small base … it is a company that is offering something only slightly differentiated from a bunch of other products. If it was something that no one else had and that seemed hard to duplicate and the market was huge, then one might try to talk oneself into it. But, here, it seems like there is eminent potential for that sales success to stop because someone else was now the darling and for the price to fall off the roof.

While I’m not going to argue with that point, I think the really compelling issue is that … despite some very nice recent growth from a small base … it is a company that is offering something only slightly differentiated from a bunch of other products.

If you feel that way, then 49x isn’t even worth considering. So that maybe should have been ruled out in the discussion. I’d imagine a large majority of folks on this board would be buying Zoom if the valuation was closer to the norm, Zsacaler notwithstanding.


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It is the way I see the discussion so far. The sales growth is very compelling, but the argument is sort of “the sales growth is compelling, so they must be doing something right”, except that I haven’t seen a compelling presentation on what the “something right” might be. Our hands on experiences seem to vary from positive to meh. Some will say that it just works without the hitches they have experienced with other products, but others say the same about other products. And, even if it is true that they have made a small improvement over the competition in ease of use or stability or whatever, how durable is that? It could disappear with the next release of one of the competing products. There just doesn’t seem to be anything very sticky here.


I know nothing about Zoom, but its an interesting case of a winner-take-almost-everything market.

We were looking for chat messaging clients for my company, and being very budget sensitive, I tried a whole bunch of different messaging clients, from free to slack (Slack being the most expensive, about $5/user/month I think).

Slack was about $1/user/month more than the other options (apart from the free, open-source one that quickly went into the too hard basket). So, 20% more than the alternatives (eg: HipChat).

We went with Slack. Because it was marginally better, things just worked a little bit smoother (basic things, like being able to copy and paste an image straight into the chat). And $1/user/month wasn’t worth wasting any more time considering.

That is Slacks secret sauce. It appears even less differentiated than Zoom, but in a winner-take-most market, slightly better matters a lot.

My guess is that Zoom is a similar position. It’s about the same price or a little bit more, and it works a bit smoother.

Just speculation…

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I think Zoom is overpriced now for sure, but not necessary a tulip type of bubble as some suggested on this board on Friday. It has good revenue, good growth, profitable, excellent corporate culture, founder led. What do we not like? The stock price. I personally would like to purchase if the price dropped below $50. I still think the TAM is huge, and $12B for such a high quality company with proven business model, is still good investment for long-term investors.

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What do we not like? The stock price.
Well I don’t like that it has lots of competition and no magic sauce compared to the others. And that the business process of teleconferencing is neither central to most companions nor a broken one. It is being served already.
Zoom itself is not a bubble, it is real company with a real product, but the stock price pf Zoom may be.
. Like Tinker I do not let price get in the way of stock purchases, I know that I will rarely be the only one to see a good thing. It takes some whopping phony FUD to drive the price down as long as the numbers are good. But there is a limit

If I owned 50 stocks, planning to hold for several years, Zoom might be one of them. But not with 10 stocks, and not at this price. That being said I think that the market has caught on to SaaS stocks and I don’t expect a continuation of the outsized gains we had for a couple of years. But a 50% annual increase in sales will still leave us in good shape in a year assuming the same P/S applies.