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

[brittlerock]

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.

[Darthtaco]

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.

[fish13]

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

[Kevin2017]

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.

[GauchoRico]

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…

[Jimb05]

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

[rhill0123]

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

[Hawkwin]

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.

[bjurasz]

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

[fish13]

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

[banjr]

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

[tamhas]

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?

[rhill0123]

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

[hlygrail]

Good discussion, folks; thanks for chiming in. It’s why I started this thread. I did want to respond to this one comment, though:

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.
<<

We just did this, in fact, at my employer. Full Cisco tele-everything – Jabber, phones, WebEx, videoconferencing (with and without WebEx) rooms, the works. We switched to Zoom in a matter of a few days, really. And, it would seem that with the savings we’re apparently getting, many of the conf rooms are now getting MASSIVE (and I mean massive… the boxes are bigger than my car) new TVs – like 85" or whatever big. While I’m not sold on Zoom being “better” (and I’ve shared already that it’s crashed on my several times while the worst thing WebEx ever did was take too long to dial out to get me on the bridge), if it’s cheaper and “just works” that is A Thing ™ to take note of.

I’m likely not going to bother with the ZM IPO, especially knowing that share lock-up is down the road. Think I’ll wait and see if there is another buy opportunity; or if not, that’s OK, too.

[mschmit]

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.

Sure. But didn’t you just make the case against Zoom as well? Imagine that your current provider is NOT Zoom. And you have all sorts of equipment all setup for Skype for business or Webex, etc.
You are going to switch to Zoom to just save 10%?

My company happens to use Skype for business and we have one button video conferencing in dozens of rooms as well as in a dozen other locations. I have had two Zoom meetings (setup by other companies) in the past month. Both were a bit of a pain, relatively. One had terrible internet audio, the other was OK. One was on site with others back in the other company’s office via Zoom. I asked them why their company chose Zoom. They said Zoom is better than Skype for 100+ people on a video call.

I’m sure that the problem in comparing services is that you have to compare like to like. In other words, you have to see, hear and use the best setup of each provider in a well configured conference room…not only on a laptop.

My guess is that all the money is made on the medium to big company setup…and here switching costs are very high.

Mike

[XMFBreakerTinker]

Zoom is not going to have 100% marketshare. It is like not investing in Zscaler or Mongo because some companies choose an alternative. The numbers and collateral evidence indicate that Zoom is a special company and they are disrupting the industry.

This said, this IPO is not so much related to fundamentals and more to mania. Everyone wants to get that Elastic or Zscaler bounce and fighting to get in and then out if they can.

The other stocks that had great IPOs went public at much lower market caps. That left a lot more upside as the businesses thrived. Zoom appears to be priced to take better advantage of demand and not going out at a ridiculously low valuation as was the systematic case the last few years. You don’t need to own everything and I will wait a few moths and see what happens.

The usual pattern is the IPO taking off, and then at some point crashing and then rebooting itself. May not happen to Zoom. All depends on how that first earnings call goes. But it happens often. If such happens then I will get interested in investing in Zoom and not just buying into an extremely oversubscribed IPO mania.

Tinker

[anthonyms]

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

I’ve never received any training on any of the half dozen TC/VC providers or over a dozen migrations I’ve ever been through.

Some maybe more complicated than others but even global MNC Fortune 500 corps I’ve been with don’t bother to train on these tooks. User experience and choice appears to have zero influence in staying or migrating and even jabber and hardware installations don’t seem to make a difference to stickiness or loyalty lock in. Somewhere in corporate a decision gets taken and within weeks the employee base gets switched and user preferences and client continuity be damned.

A

[rhill0123]

You are going to switch to Zoom to just save 10%?

When we switched from Webex to zoom, we saved more than 50% (I think it was 70% actually). So zoom not only gives you better capability but it was at a substantially reduced price. It was definitely worth it, we saved a bundle.

I don’t see pricing going much Lower but I guess anything could happen.

Rob

[SaulR80683]

…The numbers and collateral evidence indicate that Zoom is a special company and they are disrupting the industry. This said, this IPO is not so much related to fundamentals and more to mania. Everyone wants to get that Elastic or Zscaler bounce and fighting to get in and then out if they can.

The other stocks that had great IPOs went public at much lower market caps. That left a lot more upside as the businesses thrived. Zoom appears to be priced to take better advantage of demand and not going out at a ridiculously low valuation as was the systematic case the last few years. You don’t need to own everything and I will wait a few months and see what happens. The usual pattern is the IPO taking off, and then at some point crashing and then rebooting itself. May not happen to Zoom… But it happens often. If such happens then I will get interested in investing in Zoom and not just buying into an extremely oversubscribed IPO mania.

Excellent analysis Tinker, I agree, and will probably do the same.

Saul

[branmin]

This is why sometimes it’s best to wait unless your broker can get you in and out for a quick profit if that is what you are after…

Lyft Investors Sue Over Slump, Claiming IPO Was Overhyped
Lyft Inc. was sued by investors who claim the ride-sharing company overstated its market position when it went public last month, leading to a dramatic plunge in its stock price.
Two separate class-action complaints against Lyft, as well as its officers and directors and underwriters, were filed Wednesday in state court in the company’s hometown, San Francisco.
Since going public March 28, Lyft has declined 17 percent to $59.51. That compares with the offering price of $72. The stock sold off sharply amid larger rival Uber Technologies Inc.’s filing for an initial public offering last week, as investors will soon have another option to bet on the potential of ride-sharing and gig-economy.
The investors claim Lyft was exaggerating in its prospectus when it said its U.S. market share was 39 percent. In both suits, the plaintiffs also dinged the company for failing to tell investors that it was about to recall more than a 1,000 of the bikes in its ride-share program.
The company didn’t immediately respond to an emailed request for comment on the lawsuits.