Zoom (ZM) raises its IPO range to $33-$35

Investment Analysis Clubs Saul’s Investing Discussions
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I think we made too much noise, and the word got out that there was interest.

https://www.sec.gov/Archives/edgar/data/1585521/000119312519…

I recall reading several folks here saying, on the order of, “I’d buy at the low end” (that being $28) but not at the high end, and now the high end is the new low end… Does that pretty much mean we’re going to sit this one out?

At $33, and with the amended S-1 share numbers (256 million), they’re coming out with an $8.4B market cap, which is in the Uber/Lyft kinda stratosphere. P/S would be something around 25+ by my napkin math.

I can see this coming out at $45 or even $50 on Thursday, which would then be something like $12B market cap. Crazy… for a company making $300M-ish in ANNUAL revenue.

Or does this land in the “you pay a premium for great companies” realm?

Add to that the lock-up, and I can’t help but think it will be cheaper to buy in down the road… Or not. :expressionless:

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If we have portfolios of other stocks that we like, there’s no reason to chase Zoom on its IPO day. That doesn’t make sense.

Is the saying, Fools rush in, or fools rush in?

I have seen more interest here at the Fool about this one, and that’s exciting, but there’s no reason to get too excited.

Karen

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hlygrail,

While I agree that they are going to be overvalued, I don’t feel it’s quite accurate to say they’re “making $300M-ish in ANNUAL revenue”. The number you cite ($330M to be precise) is their TTM revenue, but for a company growing at over 100% YOY that’s going to change quite quickly :slight_smile:

According to their S1 they did $105.8 million in the most recent quarter (up 108% YOY), giving them an implied annual revenue run rate of $423M (since the vast majority of their revenue, like so many stocks on this board now, is wonderfully recurring SAAS revenue).

If they keep up anything remotely close to their recent growth rate for the next 6 months they’ll be doing $500M+ in ARR in 2 quarters, which makes the valuation a bit easier to swallow (and to explain, I think!).

best,
nat

S1 link for any interested: https://www.sec.gov/Archives/edgar/data/1585521/000119312519…

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I can see this coming out at $45 or even $50 on Thursday, which would then be something like $12B market cap. Crazy…

This was my thinking exactly.

Allow me to whine a bit. We’re are no longer seeing companies at a PS ratio of 10 or 12 and growing revenue at 100%, like Shopify a couple years ago. Here’s how much things have changed in just over 2 years!

                    TTM Revenue      Mkt Cap
Shopify Dec16           329m           ~4b
Shopify Apr19          1049m          ~23b

Zoom    Apr19           331m          ~12b?
Zoom    Aug21            x              y

I do not yet know Zoom well enough to predict whether or not they are likely to continue their rapid growth for the next couple years+ at the rate Shopify did. But even if they can match SHOP’s growth, they’re hoping for a double in two years, not a 5x or more like Shopify has had! At $12b, so much of the best case scenario would be priced in already. Where’s the discount for the unknown?? The future is now a liability.

Ok, I’m done whining. We really do have a lot of great companies that are likely to grow rapidly for a long time. But with some of them now, it seems the market is expecting too much growth for too long. Zoom may be in this camp. Even if it can continue to achieve triple digit growth, it might not have room to grow like some others we’ve enjoyed in the past.

Bear

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I almost don’t want to comment on this but the ZM IPO is already 30x oversubscribed anyways

A lot of people have brought up how hard it is for our brains to grasp compound growth, and I think that’s true even if we’re aware of the bias and attempt to adjust for it. Consider the following 3 scenarios:

Company A has revenue of 100, valued at 2.5k, is priced at 25 P/S.
The company grows revenue at 55% YoY (like Alteryx)
In one year, the P/S will be 16.1, in two years, the P/S will be 10.4

Company B has revenue of 100, valued at 3k, is priced at 30 P/S.
The company grows revenue at 70% YoY (like ZScaler)
In one year, the P/S will be 17.6, in two years, the P/S will be 10.4

Company C has revenue of 100, valued at 4.2k, is priced at 42 P/S.
The company grows revenue at 101% YoY (a bit lower than Zoom’s current growth rate)
In one year, the P/S will be 20.9, in two years, the P/S will be 10.4

What’s the risk besides an overall market slowdown which affects all companies in the SAAS industry? A slow down in rev growth of any kind for company C. If Zoom prices out at 12.9B ($50/share), you’re looking at a P/S of 39, and price/run rate of ~30. If growth slows at any time in the next two years? You’ll probably get killed. If they continue to penetrate and take market share and grow at 100%+ (if you believe IDC, ZM is at less than 1% market penetration of the $43b TAM)? They will absolutely be a winner. (Imagine if they continue to grow 100% and thus deservedly keeps the insane 40 P/S, then you’re looking at a double in the first year. Not as sexy as what we’ve come to expect since companies like Mongo and Twilio are up 4x-5x in the past year, but still not bad)

Lesson from this illustration is there is a ton of risk involved with ZM, I don’t think it will do as well as what we’ve been spoiled by the past two years (since P/S can’t possibly expand much more) but also don’t think some of the folks here worrying about moat is putting enough stock on the ridiculous demonstrated execution by the company in the past few years. So allocate in accordance with your level of risk tolerance

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hlygrail,

Be careful with the share numbers, I count 347 M shares with options and employee incentives.

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If you’re an insider and you have a decent track on the financials it would be less risky, but for average folks buying shares on IPO day is a crapshoot. With Zoom I feel like they are in a crowded market, and competing against some very strong contenders. Doesn’t it just make sense to wait and see a couple of earnings reports before you commit? So many of these IPOs pop on day 1, and then they fall back to earth before they settle in and the market gets their growth trajectory priced out.

-----
Invest wisely my friends
CMFSoloFool - Ticker Guide / Share Holder
Profile and holdings: https://goo.gl/TYTU4S

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I posted earlier that I was definitely going to sit out the IPO frenzy and wait for a bit before taking a position - if at all. I have become more skeptical about ZM since.

Before I started reading this board I had two primary criteria for buying stock in a company. They were: a recommendation from a trusted source (suffice it to say I never defined the term “trusted” very rigorously) and a great story about their offering.

I’ve learned a lot since then, but you know, a great story is still important to me. It’s just no longer sufficient in and of itself. Saul has more than once warned of story stocks; that great biopharma company that will have a gajillion in sales if . . . followed by years if ever the fantastic new drug, procedure, equipment gets approved and the investment bears fruit.

But I just can’t get too excited about Zoom despite the great numbers. They are offering a product in an already reasonably crowded space of virtual meeting software. They have two primary selling points (the way I see it): It works and it’s easy to use. Big whoop. What’s the barrier to entry? Where’s the moat? What inhibits another startup (or even a deep pocketed established competitor) from building a competitive product that similarly works and is easy to use? I don’t see it. This is basically a video/communications tool. That’s well established technology, not anything within my domain of expertise, but certainly not so esoteric that you can’t find a pretty large pool of experienced programmers who would be considered subject matter experts.

As for customer lock-in. Of almost every company offering of the stocks we tend to follow, Zoom is by far the easiest to walk away from. What’s my evidence? Well, for one video conferencing is almost like a shovel. If you need a square nose and all you have is a round nose, you just go buy a new shovel. It doesn’t disrupt your business process of digging holes or moving dirt. The new shovel just makes it a little easier. Continuing with that analogy, if your old shovel breaks or just wears out, are you in any way compelled to buy another shovel from the same maker? Maybe the flaw was the wooden handle, get one with one of those new super-strong, lightweight carbon fiber handles. You might even be OK with paying a bit more as you expect better performance with the new shovel. The other evidence I’d offer is Zoom’s growth. I would wager that a very large segment of their customers are ones abandoning another similar product already in use. The simple fact that they can so easily hijack these customers is testimony to how easy and low cost it is to switch products.

OK, as with any analogy, it can be dissected and criticized. But hopefully my point is clear. ZM has, IMO, just about zero moat. In other words, they may experience fantastic growth for a while until competitors show up and commoditize the whole domain. How long? Give it two - three years. But, again IMO, the first couple of years of growth are pretty much already priced into the stock. If (big if) they can keep it going we might see a double in two years, but I’m betting that we will see a pretty rapid decline within months of the IPO. It will take a while just to get back to break even.

Despite the great numbers, I’m disinclined to take a position. You can’t own every opportunity. I’ve yet to get in the “ground floor” of any investment (save one, IIPR, +225% in two years. Saul has asked me to not discuss this stock, so that’s all I’m going to say about it). Even though I’ve reliably missed the initial growth spurt for almost every investment, my performance has far exceeded my expectations.

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Ok, there’s the nay. Here’s a little hay.

I’ve signed up to receive notices from Zoom. They sent me a report from Forbes Insights (in collaboration with Zoom) on the video communications market place. “The Connected Culture”

If you’d like to read it you’ll have to go to this link and give some info and download it.

https://www.forbes.com/forbes-insights/our-work/the-connecte…

I’ll hit a couple of highlights on why to the contrary I believe video communications is in its infancy of a cultural shift, particularly in business.

In the survey, businesses nearly 100% believe that visual communication enhances productivity and effectiveness. More importantly almost 90% of businesses say they will increase usage of video communications this year. 20% of all say they will significantly increase usage. Looking at companies they define as “high growth”, 45% report they will significantly increase, and the same for 37% of technology companies. Today’s and Tomorrow’s winners are incorporating this technology more and more into the daily routines and strategies of the workplace. Like with cloud computing and other shifts, everyone else will follow the leaders.

One customer in particular was interesting. Zendesk is a successful SaaS company that has an issue ticketing and tracking platform that is extremely popular. Zoom is a happy Zendesk customer. Zendesk is a happy Zoom customer. Zen says that Zoom is included on every company desktop and every laptop. All conference rooms in all buildings around the world are equipped for Zoom and are set up as Zoom Rooms(180+ in all). Across the business Zen employees Zoom 650 meetings a day. They’ve Zoomed for millions of minutes. From the hiring process to collaborating to training they Zoom.

That’s not all. Zoom is very important to the Zen platform. Like most Cloud Platforms, Zen customers can add apps to the Zendesk platform to add features. Zen has a Zoom app. A Zen customer with the Zoom/Zen integration app, can Zoom with their own customers while performing an issue ticket chat on the Zendesk platform. One click on the Zoom button in the technician’s Zen chat dashboard and they can launch a meeting and copy a link into the chat box for the customer to join. They can then do screen and file sharing as well through the Zoom integration app. You can see how useful visual communication can be for a help desk.

I posit that Zendesk is rather typical of the new breed of Zoom customer. It would not be easy nor cheap for them to Un-Zoom themselves.

Has anybody been to a place where crowds are? To an airport, the mall, a sporting event, etc. The last two years or so has seen an explosion in the number of people communicating by video. This is one of those rare cultural shift paradigms. That typically carries through to cultural shifts in the workplace. And I firmly believe that Zoom is the leading company driving that for businesses.

The numbers speak for themselves, but how about this too. Google trends over last five years. Zoom, Skype for Business, Webex, and Go to Meeting.

https://trends.google.com/trends/explore?date=today%205-y&am…

You combine that with their business fundamentals and you have one of the clearest disrupters ever. That divergence in search trends is huge and undeniable.

Darth

Never forget what Video did to the radio star.

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Been thinking about Zoom a lot lately.

Here’s a snippet:

The knock against Zoom is competition. WebEx, Skype for Business, Google Hangouts, face-to-face meetings, LogMeIn, Uber Meeting, and on and on.

What makes Zoom special? And why is it growing so fast when there are so many replicas?

Well, let’s first start with a landscape of the space.

The three top dogs are Zoom, Microsoft (Skype) and Cisco (WebEx). But when we dig into the customer satisfaction, Zoom is head and shoulders above the competition.

To put it in perspective, Zoom’s net promoter score (NPS) is 62 whereas WebEx, arguably the most formidable competitor, comes in at just 6. This means that 62% of customers would recommend Zoom’s product versus only 6% who use WebEx.

Another data point is simply the growth rates. We can opine all day on the customer satisfaction metrics, but if they are not translating into real revenue dollars, it’s meaningless. So we put on our detective hats and this is what we found.

Cisco doesn’t individually break out WebEx’s revenue so we have to do some guesswork. In 2017, the company did $4.3 billion in “Collaboration” revenue. This segment actually decreased year-over-year because the hardware, like phones and video screens, is contracting whereas WebEx is growing. However, it is nearly impossible to tell how big WebEx is at this point. The company was doing about $300 million in sales 12 years ago. If we estimated a 20% CAGR (compounded annualized growth rate) sales would be around $2.7 billion which would fit in our constraints.

But this is exactly why I believe Zoom will win. Focus.

Cisco has about 7 business segments and mind you, in each one of those there could be 3-5 different products included (like how we discussed in the “Collaboration” segment).

Same with Microsoft.

Now, of course, there are counterexamples. For instance, Amazon seems like it can nearly do anything it wants. But the way I see it is Eric Yuan is a pioneer in this space, informed with exactly what customer want and now he has meticulously executing his product vision against incumbents that structurally aren’t able to focus on their videoconferencing because it just isn’t worth it.

It’s the law of specialization. Imagine you’re a Microsoft executive and your commercial cloud business is growing at 50% at a $20 billion run rate. Are you going to take resources away from it so you can grow Skype for Business, a segment that is likely growing slowly at a few billion dollar run rate? This is why disruption can happen.

Further, videoconferencing is not an industry that is on the frontier. Typically, big companies create venture funds so they can stay on top of trends to prevent disruption. But videoconferencing is not a sub-industry like machine learning or something that a lot of start-ups are trying to tackle. I imagine this further disincentivizes Microsoft and WebEx to double down to compete with Zoom.

So while a lot of investors fear that Zoom’s “moat” doesn’t have any crocodiles in it, from a structural viewpoint, we can begin to see the snouts of the crocs rising from the depths.

Notice I haven’t even touched on the technological superiority. Zoom touts it is video-first, cloud-native and I concede that has been a crucial factor in its success up until now. But we are trying to predict the future. My bet is that these structural reasons will be the secret sauce rather than Zoom’s ability to transcript calls immediately. These superior features are birthed from the structural advantages. Since Zoom can focus on only building the best videoconferencing product, it will naturally innovate faster.

Even more, Zoom is cheaper than WebEx.

If Zoom’s technology is better and now all your employees are familiar with it, even if a competitor comes in and undercuts it 50% ($20/month for enterprise plan to $10) then your cost savings for switching 500 employees over is $60,000. That is not a sum that is a game-changer to risk the workflow of all your meetings. Especially, a huge company that can afford 500 hosts. The switching costs are higher than people might imagine. This is the power of low-cost SaaS. People don’t like change once they figure something out and when the cost isn’t high enough to off-set that discomfort, then you have a recipe for customer stickiness.

Of course, the valuation of Zoom will likely be bonkers so take these thoughts with a grain of salt. Anything over $12 billion is probably a stretch off the bat.

Oh, one more thing. When I interviewed the CEO of Walmart, they sent over a Zoom link. That’s the Fortune 1 company in the world using Zoom. Just an observation…

I do think Zoom’s moat is bigger than people might imagine. Just because it is videoconferencing doesn’t mean it is easy to whip up something. It’s all about the marketing! It’s not so much about the product. Look at what Zoom spends on marketing vs. R&D. It is huge! Once you penetrate these big organizations, why would they go with a smaller player when the cost savings aren’t that great?

I would appreciate some specific push-back because I am sure some of my thinking isn’t crystal clear. But I hope that helps…

Best,
Fish

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I agree with you, Fish. The biggest lesson I learned from Saul is to look at the numbers. If they can grow revenue for more than 100% for several years, there must be some secret sauces.

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To put it in perspective, Zoom’s net promoter score (NPS) is 62 whereas WebEx, arguably the most formidable competitor, comes in at just 6. This means that 62% of customers would recommend Zoom’s product versus only 6% who use WebEx.

This is not what a NPS is. NPS goes from -100 to 100.
If a customer rates them 9/10 or 10/10 that means that they would recommend the product/service.
If a customer rates them 7/10 or 8/10 that means the customer is passive in terms of recommending the product/service.
If the customer rates them 0/10 through 6/10 that means that the customer is a detractor.

Here is how NPS is calculated:

https://www.surveymonkey.com/mp/net-promoter-score-calculati…

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Darth and Ryan-

I agree with everything you said.

A company doesn’t grow this quickly, at over $300 M in revenue, in an industry that has competition, without having a big competitive advantage. period

I see the risk as how quickly will revenue growth slow down, because we know it will slow, it can’t stay above 100% for long.

Here are the last 8 quarters.

1Q18 27
2Q18 33
3Q18 41
4q18 51
1q19 60
2q19 75
3q19 90
4q19 106

And the net gain quarter over quarter starting with 2Q18:

6
8
10
9
15
15
16

This is the number I’m going to watch, because the growth rate will slow down, but the dollar amount shouldn’t.

If we use a gain of $16 M each quarter this year, they end the year at $584 M and 76% growth.

That is the floor I’m looking for, anything less is troublesome, and they should do better.

It will interesting to see the valuation at open. I think $12 B would be my guess.

Jim

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RE: Zoom’s moat

Imagine you have employees all over the world (you are a global company) and you’ve invested a lot of time and energy implementing a collaboration tool. You’ve trained nearly every employee on that platform. Your sales, marketing, finance, R&D, and other G&A teams have 4-5 meetings each day that use it. Your customers are familiar with it, as your inside sales team regularly runs sales calls on it and your marketing team runs webinars.

Your conference rooms (50 of them) are all wired for it, and to run a meeting you literally walk into a room and click a button on a screen and you are on a video cast with people on 3 other continents.

Now someone in IT says he wants to you to switch to some other provider. Imagine how big a task that would be. Literally every employee in your company would need to be re-trained. Every conference room would need to be ripped apart. Your customer interactions would need to be adjusted.

And for what? Zoom is already the lowest priced option. Some new competitor is going to, what, save you 10%?

RE: Zoom’s competition

They have already kicked Cisco’s butt and kicked Google and Microsoft’s butt. Who’s next, Amazon and Apple? What kind of competitor are you exactly going to fear? They’ve already beat the absolute best and mightiest. You think that was an easy accomplishment?

I’d say that are doing an awful lot right.

RE: Valuation

I would rather buy a company trading at a high EV/sales multiple that has some end-user stickiness than some IT backend product (like security solutions) trading at a similar multiple which has no end user experience.

Rob

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Literally every employee in your company would need to be re-trained.

Why?

I work for a Fortune 100 company and we use WebEx. I’ve personally never received any training on it.

Someone sends me a link to a meeting, I click on it, the page takes a bit to load, I enter as a guest or with my user name and ID, and dial in to join the call.

If my company switched to Zoom, why would my end user experience be significantly different?

Every conference room would need to be ripped apart.

Would a switch to Zoom or WebEx really require a change in hardware? I thought these were SaaS companies and not hardware companies? If Zoom requires you to use their hardware, then I would think that would be a competitive disadvantage. Whether I am a new user or someone switching from WebEx to Zoom, I would think it less likely that I would do so if I had to do any significant changes in my existing hardware.

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I’m not buying the IPO but I’m going to be watching this and will decide later if I buy shares. However, video conferencing is a big deal. We are on Skype for Business (SfB) here. We have lots of rooms with their hardware. It is relatively easy to use, relatively easy to share screens, and works… mostly. There is something about a VIDEO conference that audio-only cannot replicate. But, SfB has been a PAIN. And it appears Microsoft is abandoning it in favor of Teams. I don’t know what we are going to do, but I know we WILL replace SfB with something. You just don’t want to not have video conferencing anymore. AND IT MUST BE SIMPLE. Sometimes, people, SIMPLE IS THE MOAT. And it is surprising how often companies just can’t learn to do “simple, and it always works”.

The other moat is the H/W for the conference rooms. SfB has hardware for this. I’m unsure if we can migrate this to Teams (I haven’t bothered to ask or investigate).

Bill Jurasz

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Thanks for the clarification Chris, I actually came across that post.

I should’ve been more clear but different feel that the calculation would add much to the discussion.

Here’s the official way:

If you received 100 responses to your survey:

10 responses were in the 0–6 range (Detractors)

20 responses were in the 7–8 range (Passives)

70 responses were in the 9–10 range (Promoters)

When you calculate the percentages for each group, you get 10%, 20%, and 70% respectively.

To finish up, subtract 10% (Detractors) from 70% (Promoters), which equals 60%.

(Number of Promoters — Number of Detractors) / (Number of Respondents) x 100

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Every conference room would need to be ripped apart.

Rob, Hawkwin is correct. Zoom is software and is totally hardware/platform agnostic. There is no specific hardware required, so any “stickiness” associated with Zoom will come from its features and ease of use, not the requirement to remodel conference rooms if switching from Zoom.

banjr

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Given that this is a crowded, competitive space, the fact that they have grown dramatically in the last couple of years does speak well for them being perceived to have a better product … but one also has to acknowledge that it also speaks to the competition not being sticky. The question is, will Zoom be stickier or is it simply going to ride a crest for a while until someone comes out with something perceived as better and then the wave will go elsewhere?

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banjo, hawkwin,

My speaking is not some idle guesswork based upon browsing the web and reading reports. My office at my previous company was set up as a “zoom room” for the last 3 years, and most of our conference rooms were wired for it.

Zoom didn’t provide the hardware, it was a partner organization. But it was completely and deeply integrated with zoom. Prior to zoom we had a Webex conference room. It had totally different hardware. You had to rip out stuff when we switched to zoom. Not conjecture but historical fact.

Webex conference rooms sucked by the way, they never worked right. You needed a booklet to figure out how to use it, etc. It was a big issue where people pulled their hair out literally every day.

Regarding Webex not requiring training. Yes, if you are computer savvy or you want to do simple things, you didn’t need any. But if you aren’t that computer savvy or if you want to do sophisticated things (pass sharing of documents around from different locations, have a collaboration whiteboard, use it on your mobile phone, jump from meeting to meeting on different devices) there is a need for training.

Once I arrived at the newco, they implemented zoom within a month of my joining (they used GoToMeeting before). I went ahead and trained people as needed. Fortunately we are a small company so it wasn’t that difficult. I still miss having zoom conference rooms (especially my own office!). We will get there one day…

Rob

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