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

Zoom's stock price surged during the pandemic, reaching a price of over $550. The stock has lost more than 80% of its value since reaching its all-time high. Is now the time to buy Zoom, or was the company solely benefiting from the pandemic and should be avoided now? 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 begin the analysis, I should mention that I do not currently own any shares in Zoom. I have used their products, which I really like, but I don't have a specific opinion about the company as an investment because I have never conducted a detailed investigation before today. If you would like to view or make a copy of my portfolio, you can find instructions on how to access it here. As always, I will strive to be objective in this analysis. If you want to purchase shares or fractional shares of Zoom, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with as little as $50.

Zoom is an American company that was founded in 2011 but did not go public until 2019. It is a communications technology company that provides videotelephony and online chat services through a cloud-based software platform. They are particularly known for their expertise in teleconferencing, telecommuting, distance education, and social relations. It is known for its user-friendly interface, while also being affordable compared to its competitors. As their CEO, Eric Yuan, stated in a previous conference call, "Our growth strategy is to continually improve our product, better price and also much better service". I tried to determine if Zoom has a moat. First, I considered the concept of a brand moat, but I don't believe the brand is currently strong enough. Secondly, I considered the idea of a switching moat, as it would be challenging and expensive to transition from Zoom to one of their competitors. However, I discovered that the average contract duration between companies and Zoom is approximately 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 establish a moat in the future.

Their CEO is Eric S. Yuan. He is also the founder of Zoom, which is something I appreciate, as founders are typically committed to growing the business. Prior to founding Zoom, he was the President of Engineering at Cisco. He joined Cisco because he was one of the founding engineers of WebEx, a web conferencing startup that Cisco acquired 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 applications from Shandong University of Science and Technology, and a master's degree in geological engineering from China University of Mining and Technology in Beijing. Later, he completed an executive program at Stanford University. He has been named one of the most powerful people in enterprise tech by Business Insider and has been recognized in the Bloomberg 50 for his transformative leadership in global business. In 2018, he was named the number one CEO of a large U.S. company by Glassdoor. I believe that Eric S. Yuan has the credentials and the experience to lead Zoom moving forward.

I believe that Zoom currently does not have a moat, but it has the potential to build one. However, I feel very confident about the management. Later, I will use a discounted cash flow model to calculate a price for Zoom. But before I do that, let's take a look at some key financial metrics.

Below, we will examine some important financial metrics. Zoom's fiscal years end by the end of January, which is why we have numbers from 2023. The numbers from 2023 cover the period from February 1st, 2022, until January 31st, 2023.The first thing to notice is that revenue growth has decreased significantly in 2023 compared to previous years. Nonetheless, Zoom still managed to increase their gross profit margin, which is a positive development. However, the operating margin, EBITDA margin, and EBIT margin decreased significantly in 2023 compared to previous years. This is a concerning trend for investors. The lower margins have significantly hurt profitability, as EPS came in at 0,3 compared to 4,5 the year before. It is a decrease of more than 90%. Zoom is still profitable, but seeing margins and profits decreasing like this is a warning sign. If you are invested in Zoom, you must hope that Zoom can regain its growing margins in the current fiscal year.

Before we proceed with the discounted cash flow model, I would like to examine the risks and potential of Zoom. The biggest risk, in my opinion, is the absence of a competitive advantage (moat). Without a moat, Zoom is vulnerable tolosing customers. I already mentioned that the length of their contracts is, on average, only one year. This means it is very easy for customers to switch to competitors. Furthermore, companies like Microsoft offer Teams for free if companies subscribe to Office. If Zoom has no competitive advantage, it is difficult to find a reason to choose it over other options. Post-pandemic work environments. Zoom had significant tailwinds during the pandemic, as everyone had to work from home. As the pandemic subsides, people are returning to work, which would decrease the demand for a company like Zoom. Growth is slowing down. The growth is slowing down. The revenue growth in 2022 was the lowest since the pandemic started, and the decreasing margins are very worrisome as they significantly impact profitability.

There are also potential growth for Zoom moving forward. They introduced three pillars of growth that will drive the company's growth moving forward. The first pillar is a unified communications platform. Zoom already offers video conferencing, events, chat, and phone. The missing link among 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 easy to configure and deploy. It brings together all unified communications and supports channels such as video, voice, SMS, and webchat. The total addressable market of contact centers like this one is projected to reach $18 billion by 2024. The second pillar is hybrid work. Zoom believes that post-pandemic, hybrid work is going to become more flexible and less dependent on location. Zoom aims to provide a consistent experience, whether you are at home, traveling, or in the office. This could help establish a competitive advantage for the brand if they outperform their competitors. It seems like hybrid work is the future, as a survey conducted by Gartner showed that 99% of the 258 human resources leaders whoparticipated believe that hybrid work is here to stay. The third pillar is business workflows. Zoom wants to leverage its API marketplace, its apps, and SDKs (software development kits). The way to do this is to integrate Zoom into other platforms in order to enhance the communication and collaboration experience for their customers. One example is the Zoom-DocuSign integration that allows customers to review and approve a document while attending a Zoom meeting. Zoom believes that this is a tremendous opportunity for further growth.

I have now investigated the financials, risks, and potential of Zoom. I will now examine the price by utilizing a discounted cash flow model. To do so, I will need some numbers that you can see below. The numbers are the 2023 figures, which I found on Finbox. However, I have determined the perpetuity growth rate and the discount rate myself. The reason I chose a 3% perpetuity growth rate is that it typically falls between the historical inflation rate of 2-3% and the historical GDP growth rate 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 falls within the typical range of 9-12%. I decided to go with the highest one because of the absence of a moat. Remember that all the numbers used 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 have chosen to take a more conservative approach when it comes to EBIT growth and anticipate a 30% annual increase, which is lower than the forecast at Finbox. This forecast at Finbox is based on input from various analysts. I calculated a 30% annual growth in Depreciation & Amortization. It is lower than the historical numbers, but it is a number I feel comfortable with. Finally, I have decided that net working capital will decrease by an average of 6%, which aligns with the forecast on Finbox. I haven't found a convenient method to share my entire spreadsheet here, but after conducting my calculations, I determined that the intrinsic value of Zoom is $69.

Having investigated Zoom, I found that the company thrived during the pandemic but needs to find its footing in a post-pandemic world. While I appreciate the management and their solid plan to grow Zoom in the future, I am concerned about the absence of moat. The lack of a moat is evident in the decreasing margins and profitability. Additionally, the return on invested capital (ROIC) decreased from 23,4% to 1,3% year over year. I don't necessarily think that one year's results should determine whether one should invest in a company or not. However, I would like to see how Zoom performs in a post-pandemic world before considering it as a potential investment. Another issue with Zoom is that they have increased their diluted shares from 276,4 million in 2020 to 292,3 million in 2023. This is a trend that I find concerning, although it is worth noting that they did decrease from 298 million in 2022 to 292,3 million in 2023. I believe there are too many factors that argue 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 successfully execute their growth plan for Zoom, you must decide for yourself how much of a discount you want on the $69 intrinsic value I calculated for Zoom. Personally, I would like at least a 50% discount for the risk/reward to be worth it.

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