Zoom - the thesis going forward...

Investment Analysis Clubs Saul’s Investing Discussions
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This is an excellent post from AThinkingFool

https://discussion.fool.com/this-is-great-news-for-the-world-and…

Its something I sent a private message to Saul about this morning and he encouraged me to put it out on the board.

I’m trying to get into the habit of regularly challenging my conviction on all my companies. I’ve been struggling with Zoom recently, and now the vaccine news has hit, its brought this front of mind.

I like to hold my companies firmly believing their current market cap could grow 200% in a 2 year window. With Zoom, we know they are going to have incredible Q3 & Q4 numbers. But once they start lapping in 2021, companies move back to a hybrid WFH model, how will the revenue growth numbers justify a $200b+ valuation in 12 months? Perhaps best case they will be doing 4b in revenue in FY 2021, a 50% growth rate, based on the new product lines from Zoomtopia, weighed against the comps they have to match up to.

I know the board, and particularly Saul, avoid valuation concerns, but I’m looking for more confidence on why we think Zoom can hit 2x from here…

I was looking at Salesforce, a former SaaS darling, with $20b of revenue, 30% growth and valued at $235b ish as a comparison which has me slightly worried.

I look forward to your thoughts!

Andrew

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What percentage of Zoom’s business is online K-12, college and online church? Those will go away when the virus does. Are Zoom accounts still free for them?

Business likes them. Even when covid is gone, they can still save travel costs. Work from home has become attractive and will probably remain in smaller quantities. ZM is leveraging their dominance today to get into adjacent areas.

I doubt CRWD will be impacted by the vaccine. Or DDOG. Market may think that for a while, but not long. ZM, they are impacted. How much?

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Thanks for bring ping forward this argument Andrew. I had Zm over weight the same amount prior to COVID as I do currently, 20% of portfolio. I see the s-curve getting compressed so my exit may be sooner (top of the hockey stick); but, the company was amazing and still is, IMO.

A good read on the TAM and a little on the s-curve of adoption here:

https://discussion.fool.com/what-is-zoom39s-tam-34608209.aspx

If I’d bought Zoom because of COVID I’d be out today. Instead I sold 10% of my 21% position in NET, which had taken my top position due to the recent run, and added it to Zoom.

Jason

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Hi Andrew-
Thanks for this and sharing AThinkingFools post.

“With Zoom, we know they are going to have incredible Q3 & Q4 numbers. But once they start lapping in 2021, companies move back to a hybrid WFH model, how will the revenue growth numbers justify a $200b+ valuation in 12 months?”

$200B equates to a stock price of approx $800/ share. After the current meltdown, $600 would look great.
Zoom grew to 45% of my portfolio because I could not find another company with prospects that seemed stronger. The recent hit to the IRA portfolio hurts.

The points I’ve zeroed in on from this and other threads are the following.

Crowdstrike should not be lumped in with Zoom. Businesses still need security.
That Crowdstrike is also getting pummeled, seems to confirm the market is completely irrational. Others have suggested the sell off is bot generated and algorithmic.
Rotations happen away from SaaS. When they inevitably return in our favor, our stock prices will be pushed higher.

Has the Zoom premise fundamentally changed? I don’t think so. Hybrid WFH doesn’t hurt Zoom.
The subscription is seat based, not usage based. Businesses will keep the subscriptions.

Zoom has plenty of growth opportunity internationally.
Growth may slow but won’t come to a standstill.

I’m looking forward to the 12/3 conference call. When Zoom announces another incredible quarter, the pandemic will be far from over.
A vaccine will still be months or even years away for hundreds of millions in our population.
The market should react positively. I believe the stock will make another run upward.

Patience now during the drop is key. This isn’t a time to sell.
I will be trimming this winter though.

Thanks
JT

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ZM earnings on 11/30. From their website:
Zoom Video Communications, Inc. (NASDAQ: ZM) will release results for its third quarter of fiscal year 2021 on Monday, November 30, 2020 , after the market closes. A live Zoom Video Webinar of the event can be accessed at 2:30 pm PT / 5:30 pm ET

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JT,

I agree, the use case hasn’t and won’t change. I don’t expect the churn to be super crazy considering they have already modelled it conservatively vs pre covid rates.

The key question is the growth. You could argue that most businesses that will use Zoom, have already done so, is there any evidence from management that they see international as an opportunity?

It looks like growth is going to be fuelled by winning customers from Teams, WebEx etc, and then the roll out of Zoom Phone etc. Or perhaps management will show us their sales team have done an incredible job of converting consumers, education and existing clients to pay more… Hopefully the Q3 earnings call can add more flavour to that.

I had actually sold out fully of Zoom a few weeks back and have subsequently bought back at $370 as, like you, I believe there is some big upside now up to the $600 range.

But will Zoom still be a hold after that? Looking forward to the call!

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The key question is the growth. You could argue that most businesses that will use Zoom, have already done so, is there any evidence from management that they see international as an opportunity?

From my August recap:

What is most amazing to me is just how big Zoom’s total market could eventually get. As highlighted above, the Americas grew 288% this quarter while the rest of the world grew 629%(!!!). With international revenues still just 31% of Zoom’s total, that means the larger untapped market is growing more than twice as fast off an already sizable base. Even better, these rates accelerated from Q1 when the Americas grew 150% while international grew 246% and accounted for roughly 25% of revenue. Just take another look at those figures. The international opportunity is enormous, and the exponential growth suggests to me Zoom’s phenomenal performance will not end any time soon.

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Stocknovice shared the numbers that really highlight the international growth potential.

Using Cloudflare as a comparison, international represents 48% of Cloudflare’s business. At only 31% of Zoom’s business, but growing at more than twice the US rate,
significant international opportunity remains.

From the conference call a couple quotes stood out.

Kelly Steckelberg – Chief Financial Officer
We will continue to invest in international expansion to capitalize on our brand awareness and the increased global opportunity.
So, we’re still in early stages. And when we look at penetration, like we look at it in the Global 2000, like, there’s a small percentage that have a significant spend with us,
so there’s tremendous opportunity still ahead.

Will Power – Robert W. Baird – Analyst.
I want to ask a question on the rest of world strength. You saw a surge activity there.
Usage revenue obviously grew significantly as a percentage of the total. Were there any particular regions or countries that stood out?

Eric Yuan – Founder and Chief Executive Officer
Yes. So, if you look at our free users or paid online subscriptions, right, it’s coming almost everywhere.
However, if you look at the number of visitors, you know, to our website, top countries like, for sure, you know, U.S. obviously No.1 and [Inaudible] No.2, Japan No.3, Canada, U.K., No.4 and No.5.
I think users almost, you know, from every country, right?
I think organic growth because of the brand awareness, I think are really helping us.
So, for now, we just say, no matter where the users come from, we would like to take a step back to see where we can do different to serve them better?

In terms of having a local data center, like we just announced a data center in Singapore. And also, that we double down on India presence,
and we are going to have a team to capture the growth from international expansions.

Kelly Steckelberg – the growth outside the world was really consistent between EMEA and APAC. So, we’re very pleased with that.

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I’ve sold out of Zoom, perhaps for different reasons than what motivates others here.

Zoom growth in recent quarters has exceeded anything i have ever seen, and growth became strong enough to satisfy my valuation concerns. i had bought in the $70s, sold in the $120s, bought back in the $190s and sold in the mid $400s. Weighting started small but grew to a mid position as the share price increased.

But Zoom was never high conviction for me partly due to valuation/Bert’s red light, but primarily because the CEO is not among the giants in tech, IMO. Some here have suggested that the Zoom CEO might be more capable than the SNOW CEO Frank Slootman, which is i see as a clearly incorrect judgement.

Slootman is capable of leading a much larger, more complex company than Yuan. Not intending to speak ill on Mr Yuan. Leadership is role specific and Mr Yuan has done a spectacular job in creating and building a $100B+ company. But IMO, in a vacuum, Slootman has far more capability than the Zoom CEO to get his arms around a much larger company.

If forced to choose, i would guess SNOW would become a larger company over time than Zoom, assuming constant CEOs. Some of you may know that i place greater weight on company leadership than most and see myself as qualified to make sound judgements on that.

(i have no position in SNOW and am not predicting future stock prices of ZM or SNOW.)

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Yeah, not sure where you’re getting the data points that Yuan is not as capable as Slootman.

Does Slootman have more professional experience than Yuan? Yes, he’s also 10+ years older but he’s a professional CEO vs. Yuan is more of a visionary who created a product that disrupted a saturated market and seems to be doing a fine job navigating this pandemic and scaling his product across the world. Not to mention Yuan has insanely good Glassdoor ratings and has won awards for being an excellent CEO.

I guess this is just a matter of personal opinion since I’m not sure how you would actually determine who is more “capable” as a CEO.

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Does Slootman have more professional experience than Yuan? Yes, he’s also 10+ years older but he’s a professional CEO vs. Yuan is more of a visionary who created a product that disrupted a saturated market and seems to be doing a fine job navigating this pandemic and scaling his product across the world. Not to mention Yuan has insanely good Glassdoor ratings and has won awards for being an excellent CEO. I guess this is just a matter of personal opinion since I’m not sure how you would actually determine who is more “capable” as a CEO.

Maybe it would help to frame the CEO comparison question as a hypothetical, this way: If SNOW (the company, really) were to fall apart for totally non-CEO reasons and we were to assume Slootman knows (practically) as much about Zoom as Yuan does, then say there’s a call by some group to replace Yuan with Slootman as the Zoom CEO. Would such a change in CEO be a good thing or a bad thing for ZM shareholders?

A less … ideal analogy is like when we decide whether to trim or add to a stock position: it can be beneficial to ask, “If I didn’t own any of this [whatever stock] at all, how many of my dollars would I want invested here?” I have my own answer to this oversimplified question, but I’m interested in the thoughts of others.

-n8 (long ZM but not SNOW, and comparing Slootman & Yuan seems a little apples-oranges to me here)

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“I guess this is just a matter of personal opinion since I’m not sure how you would actually determine who is more “capable” as a CEO.”

Most probably feel that way.

It’s a matter of science to me and not a matter of opinion and i’ve been at it a long time. My stuff on capability is based on the mind boggling work of the late Elliott Jaques, an unrecognized giant in the field.

I’ve hesitated for a long time to share my view on this subject since i expected it would not be too well received and i have nothing to gain. But i have gained very much from this remarkable discussion board so i thought i might do a little good for one or two here.

Peace.

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Speaking of SNOW and Zoom. I just keep coming back to this post by wpr101:

Nice comparisons especially on the leadership part. Founder led is definitely superior. Also I read that Slootman had to come out of retirement to be hired. From the S1 it showed he had the highest amount of shares at the company be valued at ~3 billion. I found it strange he has more shares than anybody there being there for only a little over a year?

Me here: As of 91 days from September 16, 2020, most employees can sell 25% of their vested shares. If my counting is correct, this date is December 16, 2020. This means up to 11.3 million additional shares could be sold in the open market in mid-December, diluting the available float by around 40%

wpr01 goes on to say-
I have pointed this out in other threads, but Snowflake’s growth is juiced by massive expenses. Compare the two S1s:
https://www.sec.gov/Archives/edgar/data/1585521/000119312519……
https://www.sec.gov/Archives/edgar/data/1640147/000162828020……

Going off the last fiscal year from their S1s:

Zoom, revenue 330M, total expenses 263M (80% of revenue)
SNOW, revenue 264M, total expenses 506M (191% of revenue)

Breakdown of those expenses:

Zoom
R&D: 33M (10%)
S&M: 185M (56%)
G&A: 44M (13%)

SNOW:
R&D: 105M (39%)
S&M: 293M (110%)
G&A: 107M (40%)

Now imagine that Zoom had the same ratio of expenses at Snowflake. This would mean Zoom would spend 4x as much on Research and Development, 2x as much as Sales and Marketing, and 3x as much on General and Administrative. Zoom’s revenue growth had they done this would have been even more massive. This is why I am saying that Snowflakes numbers are pumped.

Me here: So I’m waiting for at least a little while to get a feel for the trend with SNOW here.

Jason

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Zoom
R&D: 33M (10%)
S&M: 185M (56%)
G&A: 44M (13%)

SNOW:
R&D: 105M (39%)
S&M: 293M (110%)
G&A: 107M (40%)

…

Me here: So I’m waiting for at least a little while to get a feel for the trend with SNOW here.

Jason

I’m in the same boat. It does appear that SNOW’s expenses as a percentage of revenue are coming down, so at least the trend is in the right direction. I don’t have the numbers on hand but I seem to remember thinking they’d have $800m in expenses with $500m in revenue this year or next, and perhaps close to break even the following year. But with the IPO lockup also coming in it’s hard to see missing out on a big run in the next few months.

That said, ZM probably got hundreds of millions in marketing for free due to the pandemic, so their efficiency is probably overestimated based on current numbers.

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What percentage of Zoom’s business is online K-12, college and online church? Those will go away when the virus does. Are Zoom accounts still free for them?

That is a good question.

But there are lots of follow on questions, such as:

  • how many hours per week do these customers use?
  • how many hours per dollar paid?
  • will schools/teachers keep their Zoom accounts 12 - 24 months from now just to be able to connect with parents and maybe students who miss school due to sickness?

Corporate customers…they will pay the same $ per seat whether an employee is doing 2 or 3 hours per day or just 2 or 3 hours per week as we return to normal.
Does this mean higher margins and higher profit for Zoom?
Who are the highest margin customers in 12 months, 24 months from now?

Mike

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This means up to 11.3 million additional shares could be sold in the open market in mid-December, diluting the available float by around 40%

That should read inflating. More supply, lower price. I ignore these one time events. I look at the big picture. Trades would certainly pay attention to the short term wiggles.

Denny Schlesinger

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In my quest for more Zoom confidence, I came across this podcast on Seeking Alpha:

https://seekingalpha.com/article/4388375-insane-growth-vs-cr…

At about 37 minutes in, the analyst mentions that during Zoomtopia, they shared a usage graph depicting usage at 50% higher than Q2 levels.

That seems pretty insane and surprising this hasn’t been picked up on?

I had a dig around but couldn’t find the presentation to back this up so would appreciate if any members on here could verify that?

Looking at Zoom traffic usage on SimilarWeb, it definitely shows a rising graph… (granted this might not capture all versions of Zoom)

https://www.similarweb.com/website/zoom.us/#overview

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At about 37 minutes in, the analyst mentions that during Zoomtopia, they shared a usage graph depicting usage at 50% higher than Q2 levels.
That seems pretty insane and surprising this hasn’t been picked up on?

Hi HorsePlayAndrew,

I attended the Finance Analyst call during Zoomtopia, and thought I had saved the pack down. Anyway, I made some notes on it here: https://discussion.fool.com/zoomtopia-king-of-the-castle-3464170…

For your point, the Zoom CFO was very quick to dispel the significance of this usage graph, as I noted:

Annualised Meetings Minutes Run Rate

Q121: 2.6 trillion
Q221: 2.0 trillion
Q321: 3.3 trillion (!!!)

Kelly Steckelberg (CFO): the downward fluctuation over the summer months in Q2 while annual meeting minutes increased in Q3 is due to schools reopening. This does NOT necessarily correlate to revenue (we must remember that Zoom has offered free service to 125,000 schools. Zoom should be in a good position to monetise these in due course).

So Zoom derives its revenue based on subscription, not usage. The real question, is how many of these schools will Zoom be able to monetise ‘post Covid’ (hopefully enough are already integrated on the platform).

If we were to take it a step further, when usage subsides as people return back to schools, there may actually be some positive impact for Zoom (presuming the schools maintain their subscriptions). Usage on Zoom’s servers represents an infrastructure cost, so if it is not monetising this usage it is eating into their margins.

Perhaps this is just one factor built into their updated and improved gross margins during Zoomtopia: Gross Margin long term outlook updated to 80% (72% in Q2).

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Great stuff thank you.

Shoddy work from that analyst talking it up with no context!

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Hi HorsePlay Andrew and ATF,

If you’re still interested, I do have the link to the Zoomtopia presentation and it includes the slide with the stats that ATF provided in his reply to your question.

The presentation itself is worth the read as it contains other stats as well as a good overview of all their product offerings including a Zoom phone presentation and a mention of all new features and enhancement including new features helping enable RE-ENTERING the office.

https://investors.zoom.us/static-files/cc304d8e-12cd-464d-95…

Rita

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