IS THE ZOOM BOOM DOOMED? / THE FINANCIAL TIMES

Is the Zoom boom doomed?

By: Jamie Powell


During the market carnage wrought by coronavirus, a rather obvious trend has developed.

Investors, perhaps in shock at seeing many of their most beloved companies collapse, have turned to a clutch of stay-at-home stocks (or, erm, SAHs), which should benefit from us humans being locked up like caged animals for at least the next month.

Think indoor virtue-signalling device Peloton, prepared-meal-kit providers Marley Spoon, or MSN-messenger aper Slack.

However, one stock has leapt above them all: video conferencing platform Zoom, which has seen its share price rise 41 per cent since February 16:




Investor enthusiasm has taken Zoom’s market capitalisation to a touch under $39bn, over triple the valuation it listed with just over a year ago.

By anyone’s standards, the stock looks pricey: Zoom’s equity trades at 37 times forward revenues, according to S&P Global Market Intelligence. Gaze forward to 2024’s estimated figures and it doesn’t get much cheaper: 7.7 times that sales number. That suggests investors think Zoom’s growth will continue to accelerate post-Covid-19, no matter when (or if?) we return to our offices.

So has the market got it right?

On the face of it, the narrative adds up. Shackled to either our sofa or an uncomfortable dining chair, many of us are looking for ways to continue the flow of communication with our team mates and wider colleagues.

Enter Zoom which, thanks its easy-to-use interface, has become the app du jour for those wanting to spy on each other’s book cases. Alphaville can attest to its quality: a recent “pub quiz” (read: quiz) found us gazing at a dozen smoothly streamed windows into the lives of others. They were pretty impressive.

The hard data also speak to Zoom’s growing dominance in Stasi-simulacra. An April 1 memo by chief executive Eric Yuan revealed that its daily meeting participants — that’s tech speak for “people using the product” — had risen from 10m at the end of December, to 200m in March. At pixel time on Apple’s app store, it sits at number one in free apps, above Generation Z favourite TikTok and recent debutant House Party:




Whether this explosion in usage translates into positive cash flow is another matter. The company has yet to give an update on its pandemic-tinged finances but, to its credit, the past financial year was at least spent in the black. Net income was $25m and free cash flow $120m, although most of that gap can be explained by the $73m of stock compensation it paid to its employees.

However, quintuple both of those numbers to reflect its new user base, and $600m of free cash flow still not enough to justify a $39bn valuation, unless you think a highly uncertain projected cash flow yield of 1.5 per cent is good going in this market environment.

And that quintupling is assuming, of course, that those free users convert to paid-up ones. Zoom’s pricing plan for hangers-on includes unlimited one-to-one meetings, and group chats that can hold up to 100 participants for a maximum of 40 minutes. The incentives for a new team to upgrade don’t feel that strong.

Then of course one has to think about the notion that these new users will stick around.

Much has been made about how this pandemic has proven that working-from-home, erm, works and therefore companies will be more flexible after the lockdown when it comes to allowing employees to peruse daytime TV.

But equally, an argument could be made that the crisis has actually revealed the deficiencies with that arrangement, particularly when it comes to jobs that require shared expertise, tight feedback loops and, for a lack of a better phrase, incessant chatter. Think creative jobs, or software engineering, or even journalism. In these industries having colleagues around is a feature, not a bug.

Zoom also has a more pressing issue to deal with: security.

Just this Tuesday morning, Singapore suspended the use of the app by teachers after a “very serious incident” during a web-based lesson. And it’s not just schools either.

The Taiwanese government has banned its use over fears it uses Chinese servers.

Worries over security have also caused the German government, Nasa and the US Senate to curb its use, alongside commercial organisations such as Google and SpaceX.

The company has got the message.

Last week Yuan promised to shift “all our engineering resources to focus on our biggest trust, safety, and privacy issues” over the next 90 days, after he admitted that “we have fallen short of the community’s — and our own — privacy and security expectations.”

In a world where security is paramount — whether it be in government agencies or intellectual-property driven corporates — this may not be enough.

That spells potential trouble for Zoom’s bottom line as these organisations often provide the stickiest revenue to businesses, like Zoom, that aim to cement themselves as an immovable part of an organisation’s day-to-day workflow.

For Zoom it’s a particularly acute issue not just because there’s a huge new user base to convert into real, recurring revenues, but because the competition is fierce.

Microsoft’s Teams, for instance, which offers a lot of the same functionality, recently bigged up its privacy and security settings in a blog post.

Though it’s fair to say its existing user base on Office 365, as Slack investors have found out, are pretty easy to up-sell to.

Particularly if the competition is dropping the proverbial ball.

There is little doubt that in the first half of the year, and likely in 2020, Zoom is going to post blockbuster numbers.

Yet investors should be cautious extrapolating this explosive growth beyond 2021, when the economy, and earnings, should begin to normalise.

If Zoom returns to its admittedly quite impressive 2019 trajectory, it looks like the stock only has one way to go, and that’s down.