Zoom - Why the free users are big asset

Long time lurker, first post. Thank Saul and everyone for creating this exceptional discussion and learning environment.

Zoom has the rare opportunity to be a first-tier company that builds a platform to reach everyone. Such an opportunity provides Zoom with a growth potential much better than CRWD, DDOG, etc.

First-tier company builds a good platform, and the second-tier company builds good products
Many great minds on this board believe there is no way for Zoom to monetize its free customers. I do not agree. Experience during the last two decades is that as long as you can reach everyone on the earth, don’t worry about how to use this connection - you’ll find 100 ways to monetize that. Think about Facebook, Linkedin, Amazon (the market part without AWS).
IMO, there are two kinds of good companies. A first-tier company builds a good platform to reach all users, and a second-tier company builds good products. There are not many first-tier companies: Apple built an IOS platform reaching many users on which developers sell applications. Apple maintains the platform, obtains a huge amount of valuable data, and gets a portion of whatever developers earn. Other first-tier companies include Android (Google), YouTube (Google), Amazon, Alibaba, etc. SNOW may have a chance of becoming a first-tier company if it dominates its field – this might be the reason why SNOW has such a high valuation today. Second-tier companies may create good products, but they are largely on their own.
Zoom may become a first-tier company
Zoom now has this rare opportunity to become a first-tier company. Thanks for the huge number of free users, OnZoom has the potential to be such a platform. Check the OnZoom website:
You can already see the yoga lessons, public speaking trainings, virtual magic shows, people sharing their everyday experience in an ivy league college, - almost everything you can (and cannot) imagine! You get customer ratings and reviews letting you know whether a service is good. Purchase a ticket (usually $5-$20) and you are OnZoom! I have no doubt that Zoom will get a share from the ticket price now or in the near future.
Though I know that I may be able to find a better price in the local Walmart, or on Walmart.com, I shop on Amazon a lot. The reason is that I am sure I can find almost anything, often with many choices (perhaps more than necessary) to pick from and get a reasonable price (maybe not the lowest). My argument is OnZoom will be the Amazon for services. I predict that in 4-5 years, I will get my accountant for tax return OnZoom, get gym lessons OnZoom, consult a lawyer OnZoom, get my daughter’s math tutor OnZoom, and ask a plumber for a quick check of my water heater OnZoom. While Amazon is the single largest distributor of many products in the US, I say Zoom may be the single largest distributor of services. Think about how large the market can be. Zoom’s market may be even larger than Amazon!
You can imagine that Zoom equals to nowadays Zoom + PTON + TDOC + Twitch + some hosts singing and dancing + …. Without a huge number of free users, Zoom won’t be able to achieve this.

Other possibilities in the future
If I make a bolder prediction, Zoom has the one-time chance to compete with Facebook for the position of the leading social network. With more and more sellers creating their portfolio OnZoom, individual users will follow that too. (maybe a 10% discount is enough incentive?) FB’s technology does not seem fancy (forgive me if I am wrong – I am not a tech guy), and it keeps its dominating position by being the first to reach a lot of users to get data and buying all potential competitors (Snapchat?).
If I dare to make an even bolder prediction/imagination, Zoom may get a large share from the on-demand economy. Uber creates an on-demand model that changes the taxi business, which toppled the traditional employer-employee relationship. Will small companies in the future outsource a part of their office workload OnZoom rather than hiring consultants? I don’t know, maybe.
Ronald Coase, Nobel prize laureate in Economics in 1991, raised a famous question: if the market is perfectly effective, why do we have companies? Instead of joining a company, a factory work should buy all upstream products directly from the market, and sell all his outputs directly to the market. His explanation is that there is transaction cost in every sale, and it is inefficient to buy/sell everything from/to the market. Thus, the economy does not fully behave as predicted by traditional theories.
Will OnZoom be able to lower the transaction cost and change the economy? Let’s see.
Valuation and Risk
What is good about Zoom is that market currently evaluates it as a pure video conference provider with maybe 60% yoy growth. If OnZoom does not prove to be successful in 6 months, the stock price is unlikely to drop much – the market does not even have an expectation here at all. We will have a loss of the opportunity cost here, meaning that we may lose the opportunity to put money in other great companies and earn a 50% return. With the upside potential so huge for Zoom, I’ll accept that cost.
Where I may be WRONG
Our investing principle here is to find a growth company with a good story and data to back up that story . Investing should be repeating what we are good at in our domine. All the above opinions about Zoom may be wrong, and they currently have not been backed-up by any growth data. Counting on those opinions without data is out of our investment domine and theoretically, we should not do it.
I have an over-sized ZM position. For those who read through here, thank you for bearing my broken English.



Yesterday I got time to listen to one of Beth’s interview about tech stocks, including Zoom. https://www.youtube.com/watch?v=YBeMwH4RmLU

Beth’s idea (I rephrase):
Most of the largest tech companies are B2C companies (with the possible exception of MSFT). Zoom got to expand from a B2B company and become a B2C company. This will greatly increase the addressable market.

It is surely hard to tell whether this expansion can give Zoom sufficient growth to compare with other great stocks we have (CRWD, DDOG, etc). I would also note that I am making a small exception for zoom to consider this “future vision” not backing up by data. We give this kind of exceptions from time to time: we allow DDOG to temporarily slow down a little bit due to COVID hoping for later recovery; we allowed FSLY to use future Compute@Edge to convince us it might lead to a better growth (which was likely a mistake.) I may also have been in love with Zoom too much.

I am curious to know whether this perspective is correct and whether great minds on this board believe such an exception should be made. Any feedback is appreciated.



If there’s an obvious choice, why make a difficult choice?

One rule of board I like is: No turn around stocks which I coincidentally employed this rule myself for many years. so I don’t buy into turn around stock like Digital Turbine, Inc. (APPS). Strictly speaking, a 40% grower suddenly become a 100% grower is also a turn around stock. I didn’t buy any Fastly because of the hype or promise. it was just a 40% grower. CEOs tend to tell us what we want to hear. Sophistication of technology doesn’t equal to superior business result. Some people even engage in HOPE investing which just hope. e.g. SITIME who’s revenue has gone downhill for couple years. You don’t buy on stock price performance alone. Good fundamentals and stock price need to synchronize.

For sudden slowdown, how to determine if it’s temporary or big trend set in motion?
Recently, I realized that in order for a slow down growth to get back to previous growth rate, it has to grow at a rate much higher than previous growth. Think of a stock that dropped 50%, it needs to double, not just increase 50%, in order to reach the previous level! Same with revenue growth rate. So for a growth stock that has revenue slow down, its revenue needs to increase substantially on a QoQ basis coming from a lowest growth rate.

Case in point: DDOG, its recent acceleration out of COVID is just 49% annualized. It’s not fast enough to get back to previous growth rate. It needs to grow at 100%, 200% annualized QoQ to get back. So I think DDOG is slowing down. Market thought so too. DDOG stock went up just 11% over the past 6 months. That’s half a year. Just my opinion, i can be wrong on DDOG.