Zooming IPO

Posted: April 30th, 2019 | Author: | Filed under: Uncategorized | No Comments »

Three years ago I wrote about Atlassian’s IPO and called them the B2B gold standard. Move over Atlassian, there is a new B2B gold standard in town and its name is Zoom.

When I evaluate a public company I consider investing in I look at six main attributes.

  • How much do I love the product?
  • How good is leadership?
  • How expensive is the stock compared to earnings? (Price to Earnings ratio)
  • How much cash does the company have to invest and/or survive a rough spot?
  • How much potential does the company have? What is their Total Addressable Market (TAM)? What other products can they create?
  • How many competitors does the company have? What is the regulatory environment?

Product Love

It was love at first sight with Zoom. I was invited to a meeting on a sales call. I had never heard of Zoom and was annoyed I had to install yet another video conferencing software. But, after a seamless download, I was impressed. Not dealing with a browser extension like WebEx or clunky software like GoToMeeting, Zoom just worked. Right away. The screen sharing also worked flawlessly. And, this is where I became hooked. It wasn’t that Zoom did more, but it did everything without crashes or hassle.

I’ve worked at three startups and all three of them use Zoom. They use Zoom for nearly everything – internal meetings, sales calls, customer calls, large company-wide meetings and more. Although it’s rare to truly love video conferencing software, it became clear to me that people had fewer issues when using Zoom compared to the alternatives.

Zoom started popping up in my life in other places as well. I’ve been invited to webinars on Zoom. I’ve been invited to groups on Zoom. Day traders use Zoom and charge people to watch them work trade during the day. Zoom is starting to grow a life outside the traditional B2B environment.

Furthermore, my product love for Zoom is backed up by more objective measures. G2 Zoom customer ratings are 4.5/5 which is higher than the 4.2 WebEx, GoToMeeting and Skype Business have. Gartner also has data that shows the Zoom product is at the top of the pack.

The “just works” mentality along with the viral nature of Zoom makes the product top notch.

Leadership

Eric Yuan is the founder and CEO of Zoom. Eric is the archetype of my favorite tech founder – hard working, technical background, unique knowledge with the ability to delay gratification.

Eric is an immigrant from China with degrees in applied mathematics and computer science.

Eric is also a former early employee of video conferencing software WebEx, which was sold to Cisco. Eric’s experience at WebEx gives him an intimate knowledge of video conferencing.

Eric has shown an ability to delay gratification. Most recently, he was criticized about leaving money on the table during the IPO and had this in response to that criticism

“When we started our company, every time we did funding rounds we left money on the table because those are our business partners. When you are trying to win, you also want your partners to win. If you lose, you lose more than your partner. So our business philosophy is always to care about our partners,” Yuan told Yahoo Finance.
“To leave money on the table is always a good thing,” Yuan added.

https://finance.yahoo.com/news/why-zoom-ceo-says-leaving-money-on-the-table-is-a-good-idea-stock-closed-up-72-in-its-debut-134047060.html

For a buy-and-hold investor like myself, it’s important to look for leaders that are thinking in the long-term.

Potential and Macro View

Despite being the most loved product in the video conferencing space, Zoom only has 10% of market share, coming in third behind GoToMeeting and WebEx.

With a low market share, Zoom has a lot of space to grow. Furthermore, as distributed teams become more commonplace, so does the need for video conferencing, which means Zoom is in a growing market. Going public will give Zoom more credibility among the Fortune 1000 which will help it steal business from the incumbents. The competition (WebEx, GoToMeeting) is held back by technical debt. The fact that Zoom was built from the ground up with reliability, ease of use and integrations in mind makes it much more resilient to the existing competition.

Cash and Price Earnings Ratio

Zoom has plenty of cash. Going into the IPO, Zoom had $275 million in assets. The IPO raised another $751 million which gives Zoom money for R&D, acquisitions and/or a rainy day.

The bad news is, I’m not the only one who noticed that Zoom is a hell of a company. Many investors saw the great product, strong leader, and the great potential of Zoom and snapped up the shares quickly, making the IPO pop over 70% on the first day. As of this writing, Zoom has a staggering market cap of $18 billion on earnings of $6 million in 2018. That results in a sky high PE of 2800. For comparison, Salesforce has a PE of 115 and other tech companies hover around a PE of 15-30.

But, everything is relative. Many SaaS companies are burning cash and using their revenue growth to justify this strategy. I prefer to buy stocks of companies printing profit and therefore look at $ZM as a high priced stock.

Bottom Line

Zoom is an excellent company with a stellar product. I expect it to be around for a long time and to improve its offerings. I currently find the stock too expensive for my taste. But, I will keep an eye on it to see if the excitement of the IPO wears off and the price of the stock comes back down to earth.