Zoom: Total Available Market May Be Larger Than What Is Priced In – Seeking Alpha

Background – my prior bullish rationales for Zoom (ZM)

When I began getting back into stocks at the very end of March, I began with such safe names as Microsoft (MSFT) and Amazon (AMZN); and a newbie, Zoom Video Communications. I discussed these in an April 1 article, 3 Antifragile Stocks I’m Buying, And Why I’m Starting Now. At that time, ZM was trading around $143. My idea was that especially for AMZN and ZM, and to a degree for MSFT, the COVID crisis would strengthen these companies, allowing them to grow as people worked from home and in general sheltered in place. Then, since they were such strong performers pre-COVID, they could take their strengthened positions and continue growing when normalcy finally resumed – whenever that would be and whatever it would look like.

My next mention of ZM came on August 18, before Q2 earnings and the very interesting conference call. This was another bullish piece; ZM was around $267. The theme was decentralization of the economy due to ZM and other companies, and was exemplified by the title, Long Zoom, Short NYC And LA.

In addition to showing some of the ways that ZM could be an important part of a transformation of the structure of societies across the world, I also made this point in the article:

… this sets the stage for me to project, qualitatively, the potential for significant revenue beats in Q2 and beyond…

Now that a very big beat arrived, with revenues up 355% yoy to $664 MM and non-GAAP EPS of $0.92, ZM has surged further, closing Friday at $370 (down from a post-earnings spike high of $478.

The size of the beat strongly suggests that analysts underestimated ZM’s market share gains.

How did a company formed about 9 years ago get so far? The question is relevant to where I think it wants to go (i.e., farther than most analysts are thinking).

How ZM succeeded prepares the ground for a new stairway to business heaven

The comments the founder and CEO, Eric Yuan,, made in an interview in January 2018 are important:

In 1997, I immigrated [from China] to San Jose, CA and secured an engineering position as one of the founding engineers at a small start-up, called WebEx. I stayed with WebEx for the next 14 years, and proudly grew the team I managed from 10 engineers to more than 800 worldwide, and contributed to revenue growth from $0 to more than $800M. When speaking with WebEx customers, I realized that the solution suffered from some deep flaws due to its older architecture, particularly a lack of usability, reliability and video quality. Simply put: it was hard to use and it didn’t work. I knew that Cisco needed to rebuild WebEx from the ground up – from the back-end architecture to the user interface to the sales model.

I told Cisco leadership, but they didn’t listen. I struck out on my own in 2011, and, fortunately, dozens of WebEx’s most talented and visionary engineers soon joined me…

By last year, CIO Dive interviewed a Gartner researcher, saying (emphasis added):

Zoom’s rise carving market share from Microsoft, Cisco

… “Zoom is in a favorable position right now in the marketplace,” Tom Eagle, senior research director at Gartner, told CIO Dive. The company is “independent, directly [competing] against giants, such as Cisco, Microsoft, Google and Adobe, and doing so successfully.”

“The only way to account for that level of growth is that they are taking share away from some of these other players,” he said. “They are actually displacing some of these other giant vendors.”

How Gartner says ZM accomplished this was by the company achievng its goals of improving on WebEx:

Gartner said Zoom catapulted to the top of the leaders list because of consistent service and reliability, and video quality.

“The continued innovation in its conference room environments — with meeting join automation and smart devices — is notable,” according to Gartner.

There is much more in the article, all of which I found worth reading. One final point to make from it is that the COVID crisis may simply be accelerating a well-understood trend:the article observes that ‘ video collaboration is normalizing flexible work solutions.”

All that was prologue to a current article that shows the degree of ZM’s success.

ZM shoots for top dog status in an industry with lots of running room

It is quite something to go from rank start-up in 2011, to a ZDNet article two weeks ago (pre-ZM earnings release) with this title:

Zoom alternatives: Best video conferencing software for business.

Suddenly, WebEx et al are just ZM alternatives?

Wow.

So, what’s it worth to be at least a mind share leader, if not perhaps the actual market share leader?

This brings me to the first of my two points, per the title of this article, namely just how big ZM’s opportunities are.

First, the basic market opportunity is gigantic. The ZDNet article begins by noting just how much better video communications are versus audio, leading off the article by asserting that:

It’s a scientific fact that communication is more effective when you can see the person you’re talking to.

In that case, as the world enters the “fat pipe” 5G era, consider this datum from an October 2018 discussion of ZM, Top 5 Reasons Why Zoom is Winning the Cloud Video Conferencing Wars:

Frost & Sullivan estimates that over 94% of all virtual meetings today are audio-only. Zoom is changing this.

Thus we have a very large opportunity for ZM as a market share gainer: many more virtual meetings now versus 2018, and a vast number of audio-only virtual meetings that are only now being improved by the secular switch to audio-visual meetings.

These factors alone suggest to me that whatever the trends occurring as a direct effect of the COVID pandemic, there are powerful ongoing secular trends that indicate a much larger audio-visual “meeting” market than many realize.

As I have not seen documented dollar figures of the ultimate value of this market, I will leave this section conceptual. But I think that in this context, ZM’s revenues are likely headed much higher just from gaining market share and from helping to catalyze the shift from audio to audio plus visual communications.

In the next section, I want to speculate further as to where success in its current sphere of operations can take ZM.

How ZM may become another Facebook (FB) and much more

The above sections relate to ZM’s view that video is the new voice. Or, to translate, in ZM’s world of the future, the videoconference term is too limiting. Remember the company’s name: Zoom Video Communications. In this world of the future, the idea that an Apple (AAPL) device only allows face to face “meetings” with another AAPL device may soon strike most people as absurd, antiquated, anti-democratic. After all, an iPhone user can have a voice conversation with a phone running on other operating systems, correct? So why not video?

So, if ZM continues to build out its vision that “video is the new voice,” and it gains market share in a rapidly-expanding video part of the giant tech-telecom market, new opportunities will become low-hanging fruit.

One of the most obvious stems from ZM’s software looking at the faces, and knowing the video-related habits of vast numbers of people every day. If a picture is worth a thousand words, then ZM will be generating vast amounts of valuable information on a meaningful percentage of the world’s population. How will it monetize that? That’s almost a trivial question. There are many ways, not only via placing ads on the site in one location or another, or at one time or another; and not just simply by charging a fee not to show ads.

Thus ZM may be in the process of challenging the core business model of FB, and more indirectly, that of Alphabet’s (GGOGL) Google division.

A different way to think of this opportunity is just how valuable ZM’s vast and growing number of minutes people are engaged on its platform can be to Amazon (AMZN), Walmart (WMT) and other retailers. Wouldn’t they just love to get a word or two, or image or two, in at the onset, during or at the conclusion of a ZM-hosted session?

The organic growth opportunities are much wider than mentioned above. For example…

ZM as a threat to all media companies

ZM makes much of its webinar business. I agree. Forget podcasts; they are radio (a large but limited technology); webinars are TV and the movies. The webinar business has so many opportunities and ramifications that I am confident that the Street has not thought this one through to its potentially logical conclusion.

Remember that ZM assumes that video is the new voice, but its more profound message is shown by the title of a ZM investor presentation:

Our goal is to make Zoom meetings better than in-person meetings.

We provide a video-first communications platform that… fundamentally changes how people interact.

When a company promotes itself this way, and enters a very rapid growth phase pre-COVID, I take the implications of its vision for its role in the world of the future seriously. Note, for example, how many points Mr. Yuan makes in response to a question from Bhavan Suri in the latest conference call:

So you have our vision right down… not only do we have webinar, but also we need to look at our entire online event management experience, right

Yuan ends his response by saying “it’s low-hanging fruits, right?,” which is limiting but I think boilerplate. Look what he says before that:

It’s not only to the real-time partmarketing content and materials, every event, right, a lot of, I think, the content, right?

Non-real time content. This can be a big deal, with a competitive advantage for ZM over incumbent media companies, because while a Netflix (NFLX) has to draw certain inferences from user behavior relative to the content it streams to the user, ZM is watching its customer. Not only is ZM going to try to make ZM meetings better than in-person ones via back-end technology, it is going to do so via AI, learning from its users. Again, note part of Yuan’s response, this time to a question from Brad Zelnick:

Zoom is not only a communications tool, go deep…

What does this founder-CEO mean? Not “just” a “tool;” go deep?

How deep?

Yuan continues:

… lever AI [artificial intelligence] functionality… Let’s say, if you change a topic, give you a quick reminder, hey, please slow down, right? So, based on face detection or something like that, all those AI features…

ZM is not an Orwellian Big Brother (who gave residents of Oceania no choice), but as you watch ZM’s content, or meetings it hosts, it is AI-ing you.

How much more valuable is that versus what NFLX and other content streamers can do?

I say: very.

So I say that our current situation is one in which ZM is grabbing some extremely long-tailed, very valuable “real estate” in which the provision of meetings may someday look as minor as the iPod now looks to AAPL.

Yet another reason I say that involves hardware.

Hardware as a service is just a marketing technique; the key is innovation

We are now in a world where almost all mega-cap tech companies are hardware-software companies to one extent or another. This leads me to wonder, perhaps idly, whether ZM will remain content to partner. Even if it does, this product looks like a good value for many users, given its $599 price:

Perfect for Your Home Office

Zoom for Home – DTEN ME is an all-in-one personal collaboration device for your home office

Connect remotely with teams | Real immersive in-office experience | The professional meeting experience from home.

Many people doing a lot of video conferencing may find $599 to be an attractive price for a 27″ device.

The device has 3 cameras and 8 microphones, and supposedly can pick up speech from as far as 16 feet away.

ZM has a growing number of partnered products, optimized both for home offices and (office-based) Zoom Rooms.

Just a guess, ZM will look to get big enough to get a growing cut of the action of a growing hardware ecosystem, but it is probably too early for it do bother competing with its ecosystem partners.

However, innovative leaders are always looking for the next new thing, and if ZM continues its penetration of home, business and governmental communications, it may develop or acquire a groundbreaking product or core technology.

Overall, I am impressed that ZM has aggressively thought through the importance of various types of hardware solutions to help it rise to greater levels of success.

Let us not forget the many risks here.

Risks, and caveats, are numerous

Starting with risk factors. Clearly there are many; please see the company’s regulatory filings for the company’s recitation of the many reasons an investor can lose money by owning ZM shares.

My list of risks, from the most important downward, currently looks like this:

  • valuation of the stock
  • competition
  • security issues
  • video may not be the new voice
  • virtual meetings may never be as good as in-person ones
  • too much R&D being performed in China
  • difficulties in managing rapid growth
  • dual classes of stock, with effective control of the company by Mr. Yuan, who is founder, Chairman, CEO and President.

Again, please see the 10-K and 10-Q disclosures of risks to owning ZM shares.

Moving to caveats, as this is my third article or part of an article on ZM, I am making this a narrow-bore one. The focus here is on ZM realizing the founder’s vision so quickly, with my view that the company we see today is just a child in comparison to the oversized grown-up that I think Mr. Yuan and his team are intent on creating.

Please comment or inquire on any topic relating to ZM that interests you in the Comments section below, as the focus of this article is far from comprehensive.

A final risk and caveat is that as you may well know, various sentiment measures are elevated, suggesting investor complacency. These include, but are not limited to, the Citigroup Panic/Euphoria Model and the Fear & Greed Index. Many stocks, including ZM and NVDA, have had big moves from their 12-month lows, and may “need” to work off bullish sentiment even if they happen to work higher over time.

Concluding comments – growth stocks are not cheap, but they might be good value for the times we are in

In my very humble opinion, ZM has the look of a winner that is just getting going, with massive potential – but remember, it’s just potential, and the stock has many risks.

I want to conclude by commenting o the theme of owning growth stocks at a time the economy is depressed, as are interest rates.

As an example, on August 21, I wrote a bullish article on NVIDIA (NVDA). The title asserted that it was still early innings for this company, a point not necessary to make with such a young company as ZM.

NVDA also has an extremely high valuation.

So why should anyone own these sorts of names?

On the one hand, they are objectively expensive.

On the other hand, I believe that in finance, there are no (or, few) absolutes. Rather, as a saver, I look at alternatives. What are the liquid, easily-tradeable or spendable alternatives to equities? I think of them in their pure forms as the four points on a (4-pointed) triangular pyramid, namely:

  • equities (ownership of a dynamic enterprise)
  • debt, stylized as default-free Treasury bonds (varying maturities)
  • gold (inflation hedge; no counterparty risk)
  • cash (Treasury bill, insured bank deposit, or plain old paper money).

Just speaking as an investor who has been around the markets for about 55 years, my best guess is that equities have the least expensive valuations right now of that group, and that relative to cash and fixed income, they are more attractive than they were in August 1999 through the end of 2000. This is because the Fed was raising interest rates then, so that a simple investment in cash or good-quality corporate debt yielded 5% or more. Rates peaked around 6.5% for Treasuries in 2000. So even a 7.5% yield on a blue chip bond correlated to about a 14X P/E, which was half the market P/E. Yet today, a blue chip 10-year corporate bond yields around 1.25%, which correlates to an 80X P/E on an earnings yield basis.

Going to specific numbers, per Multpl.com, the TTM P/E on the SPY today is 29.5X, which I believe is based on GAAP. This is almost identical to the average of the P/E on the SPY on the dates of Jan. 1, 1999; Jan. 1, 2000; and Jan. 1 2001. Note that none of those were depressed by recession, whereas today’s TTM earnings are depressed by recession.

Yet in the 1999-2001 period, that approximate 3.4% earnings yield (reciprocal of the P/E) was low compared to bonds and, most of the time, to safe money market funds, whereas today, cash and high quality bonds yield close to nothing. And, again, that represented the end of a prolonged growth cycle, whereas now the economy is struggling to make a strong recovery from the COVID-centered setback, and the Federal Reserve and the Federal government are largely “all in” on promoting growth.

So I will make the argument that this may not be a new “era,” but it is a new decade with negligible returns to passive savers to be expected for years to come. Thus we get to an interesting calculus problem for investors: what is the area under the curve for future earnings of an up-and-comer such as ZM, and how does it compare to money in the bank; a 10-year mid-quality corporate bond (or a 20-year bond, etc.); returns from gold (IAU); even Bitcoin?

There are no easy answers, but I will provide one theoretical point to consider, and one real-world one. The theoretical point is the St. Petersburg Paradox. While not a true paradox, this old concept proposes the principle that potentially unlimited upside has a greater value than one might think, and may even be infinite, even if the likely gain is very small.This can apply to ZM, in that it might just become the next AAPL or AMZN.

The practical example came from an article I read in or around Y2K. The author was discussing investing in bubbly market set-ups, and looked back at how growth stocks performed in the last secular peak for growth stocks, the 1971-2 period of the Nifty Fifty. While there was no single agreed-upon list of 50 growth stocks, the author picked one and followed an equal-dollar investment out to the time of the article. Conventional wisdom held that the Nifty Fifty comprised a bubble, but – surprise! – the list beat the S&P 500. Why? Because of one stock: WMT.

So my point of view is that when thinking of asset allocation, the math is the math, and variety is a good thing for my particular portfolio. Thus even as a retiree, I am open to and interested in the concept of both improving total returns over time while reducing various forms of risk by owning fast-growing companies. To do so, I must believe that they have realistic goals of growing much larger and then to remain leaders in important parts of the global economy indefinitely. My analysis suggests that ZM fits in that category, as does NVDA: likely very volatile, with uncertain prospects, but a realistic chance to succeed in a very big way that would make today’s stock price look cheap some years from now. This sort of thinking leads to the further view that patience tends to be a virtue if the basic fundamentals of a business remain strong but the stock acts weak for a period of time.

No guarantees! Please do your own research if interested in this or any security. What I think is right for myself is not intended to be advice for anyone else. And, to repeat, bullish sentiment may be elevated right now, so timing of entry points based on both technical and fundamental factors into any stock may be worth paying close attention to right now.

Thanks for reading and sharing any comments you wish to contribute.

Submitted Monday mid-day (Labor Day). ZM closed Friday at $369.89, SPY at $342.57.

Disclosure: I am/we are long ZM,MSFT,AAPL,NVDA,IAU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice. I am not an investment adviser. Note, may go long AMZN in the near future.

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Author: HOCAdmin