Zoom: Is it also a good post-pandemic investment?

Zoom's stock price surged during the pandemic, where it reached a price of more than $550. The stock has since its all-time high lost more than 80 % of its value. Is now the time to buy Zoom or was the company a pure pandemic play and should now be avoided? Here are my thoughts.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

This analysis will be a bit different from what you are used to read in my blog. Zoom did their IPO in 2019, meaning I don't have access to the historical numbers dating back longer than that. So instead of using the principles I have learned from my Phil Town workshop, I use the principles I have learned from the GOAT academy. I should also mention that most of the numbers I use in this analysis is from Finbox, which I believe is a great tool to get different numbers from various companies.

Before I start with the analysis, I should mention that I do not currently own shares in Zoom. I have used their products, which I really like but I don't really have an opinion about the company as an investment, as I have never investigated in detail before. If you would like to see or copy my portfolio, you can read how to access it here. As always, I will try my best to be objective in this analysis.

Zoom is an American company that was founded in 2011 but didn't IPO until 2019. It is a communications technology company that provides videotelephony and online chat services through a cloud-based software platform, and are particularly known for teleconferencing, telecommuting, distance education and social relations. It is known for its easy-to-use interface, while also being cheap compared to their competitors. As their CEO Eric Yuan said in their latest conference call: "Our growth strategy is always better product, better price and also much better service". I tried to determine if Zoom has a moat. First, I thought about a brand moat, but I don't see the brand being that strong yet. Secondly, I thought about a switching moat, as it would be difficult and costly to switch from Zoom to one of their competitors, but I learned that the average contract length a company has with Zoom is about one year. Hence, I don't believe that Zoom currently has a moat. However, they are building their brand moat, and working on increasing the average contract length, so they could very well get a moat in the future.

Their CEO is Eric S. Yuan. He is also the founder of Zoom, which is something I like, as founders are usually determined in growing the business. Prior to founding Zoom, he was the president of engineering at Cisco. He joined Cisco, as he was one of the founding engineers of WebEx, a web conferencing startup that was acquired by Cisco in 2007. During his time at WebEx, he grew the revenue from $0 to $800 million. He came up with the idea that would later become Zoom, while he worked at Cisco. When the management rejected the idea, he left Cisco and established Zoom. He has a bachelor's degree in applied mathematics with a minor in computer application from Shandong University of Science and Technology, and a master's degree in geology engineering from China University of Mining and Technology in Beijing. Later, he completed a Stanford University executive program. He has been named one of the most powerful people in enterprise tech by Business Insider and has been added to the Bloomberg 50 as a leader who changed the game in global business. In 2018 he was named as the number one CEO of a large U.S. company by Glassdor. I believe that Eric S. Yuan has the credentials and the history to lead Zoom moving forward.

I believe that Zoom doesn't have a moat now, but could build one. However, I feel very confident about the management. Later I will do a discounted cash flow model to calculate a price for Zoom but before I do so, let us just have a look at some key financial metrics.

Down below we see some key financial metrics. Zoom fiscal years end by the end of January, which is why we have numbers from 2023. The numbers from 2023 cover the period form 1st of February 2022 until 31st of January 2023. The first thing to notice is that revenue growth has decreased significantly in 2023 compared to the previous years. Nonetheless, Zoom still managed to grow their gross profit margin, which is nice to see. However, operating margin, EBITDA margin, and EBIT margin decreased significantly in 2023 compared to other years, which is something you don't want to see as an investor. The lower margins have significantly hurt profitability as EPS came in at 0,3 compared to 4,5 the year before. It is more than a 90 % decrease. Zoom is still profitable but seeing margins and profit decreasing like this is a warning sign, and if you are invested in Zoom, you must hope that Zoom gets back to growing margins this fiscal year.

Before we continue to the discounted cashflow model, I would like to investigate the risks and potential of Zoom. The largest risk in my opinion is the lack of moat. With no moat nothing protects Zoom for losing customers. I already mentioned that the length of their contracts is on average only one year, which means it is very easy for customers to switch to competitors. Furthermore, companies like Microsoft offers Teams for free, if companies subscribe to office, and if Zoom has no moat, it is difficult to find a competitive advantage. Post-pandemic work environments. Zoom had significant tale winds during the pandemic, as everyone should work from home. As the pandemic subsides people are getting back to work, which would decrease the need for a company like Zoom. Growth is slowing. The growth is slowing. The revenue growth in 2022 was the lowest since the pandemic started, and the decreasing margins are very worrisome as they significantly hurt profitability.

There are also potential for Zoom moving forward. They introduced three pillars of growth that will grow the company moving forward. First pillar is a unified communications platform. Zoom already offered video conferencing, events, chat, and phone. The missing link between all their products was a contact center, which is a new product that Zoom launched last year. The contact center is an omnichannel customer engagement solution that, like other Zoom products, should be simple to configure and deploy. It brings all the unified communications together, and support channels like video, voice, SMS, and webchat. The total addressable market of contact centers like this one, should reach $18 billion by 2024. Second pillar is hybrid work. Zoom believes that post-pandemic, hybrid work is going to become more flexible and less about location. Zoom wants to offer a consistent experience, no matter if you are at home, traveling or at the office, which could build a brand moat, if they are better than others. It seems like hybrid work is the future, as a survey made by Gartner showed that 99 % of the 258 human resources leaders that participated believes that hybrid work is here to stay. Third pillar is business workflows. Zoom wants to leverage their API marketplace, their Apps and SDK (software development kits). The way to do so is integrate Zoom into other platforms to improve the communication and collaboration experience for their customers. One example is the Zoom-DocuSign integration that allow customers to review and approve a document while attending a Zoom meeting. Zoom believes that this is a massive opportunity for further growth. In the next paragraphs I will go through my calculations to find the intrinsic value of Zoom.

I have now investigated the financials, risks, and potential of Zoom. I will now look at the price by doing a discounted cash flow model. To do so I will need some numbers that you can see below. The numbers are the 2023 numbers, which I could find at Finbox. However, the perpetuity growth rate and the discount rate are numbers I have come up with myself. The reason I chose 3 % as perpetuity growth rate is that it is usually a between the historical inflation rate of 2-3% and historical GDP growth of 4-5%. I decided to go with 3 %, which is a figure in the middle due to the current market conditions. The chosen discount rate of 12% is because it is usually between 9-12%. I decided to go with the highest one because of the lack of moat. Remember that all the numbers made in these calculations are in millions.

I also need to determine how much EBIT, Depreciation & Amortization and Net Working Capital will evolve over the next couple of years. I decided to be a bit conservative when it comes to EBIT growth and expect a 30 % EBIT growth a year, which is below the forecast at Finbox, which is gathered from different analysts. I calculated with a growth in Depreciation & Amortization of 30 % a year. It is lower than the historic numbers but a number I feel comfortable with. Finally, I decided that net working capital will decrease by an average of 6 %, which is in line with the forecast on Finbox. I haven't found a smart way to share all my spreadsheet here but once I did my calculations, I found that the intrinsic value of Zoom to be $69.

Having investigated Zoom, I found that Zoom thrived during the pandemic but needs to find their footing in a post-pandemic world. While I like the management and their concrete plan to grow Zoom moving forward, I find the lack of moat very concerning. The lack of moat shows in the decreasing margins and profitability, ROIC also decreased from 23,4 % to 1,3 % year over year. I don't necessarily think that one year's result should determine if one should invest in a company or not, but I will need to see Zoom perform in a post-pandemic world before it gets on my radar. Another thing that talks against Zoom is that they have diluted shares from 276,4 million in 2020 to 292,3 million in 2023, which is another thing I don't like to see (they did go from 298 in 2022 to 292,3 in 2023 though). I believe there are too many things that talks against Zoom as an investment, and I'm not interested in adding Zoom to my portfolio. If you are convinced that Zoom will perform well in a post-pandemic world and that management will execute on their plan to grow Zoom, you must make up with yourself how much discount you want on the $69 intrinsic value I calculated on Zoom. Personally, I would like at least 50 % discount for the risk/reward to be worth it.

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