Zoom Video Communications: Zoom In To This Buying Opportunity

Seeking Alpha2021-12-17

Summary Zoom is no longer a hypergrowth stock but is still a profitable business that can grow its earnings at 10-13% annually. The company dominates the web conferencing market that it serves in. ...

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精彩评论

Dalang
2021-12-18
Dalang
Interesting
JOHY
2021-12-17
JOHY
Oh
NormanB
2021-12-17
NormanB
This is insightful
Adrian88
2021-12-17
Adrian88
ok

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Investors and analysts are unable to change their opinion on the company and continue to consider ZM as a hyper-growth stock that has slowed.\nI believe the critical investor should instead reframe his/her view and see Zoom as a company that is dominating 50% of the web conferencing market ahead of rivals like Cisco WebEx (NASDAQ:CSCO), GoToWebinar, and Microsoft Teams (NASDAQ:MSFT). They should see Zoom as a business with high double-digit profit margin that brought in more than $1.65 billion in profits this year, and is capable of sustaining a respectable 13% average growth for the next 3 to 5 years. Further, ZM's potential to bring in a new revenue stream cannot be underestimated. For these reasons, I have a bullish view on the ZM stock. Read more in the sections below.\nCompany Background\nZoom is a video-first communications platform led by founder Mr. Eric Yuan. It is a relatively new company that IPOed in 2019. ZM shares closed at $76.30 on 1 January 2020, when the Coronavirus pandemic had yet to present itself. Exactly 11 months later, fueled by the Covid-induced global lockdown that created a demand for the company's product that allows for easy connectivity between students, families and organizations, ZM's shares rose to a high of $478.36.\nZoom not only became a household name, it also became a verb. From the time the company IPOed 3 years ago, it increased its revenue by 1,645% and its net income by 60,746%. Operating margin improved from 1.87% in 2019 to 27.3% in the TTM period (Q3 FY 2022). Net margin soared from 2.29% to 29.27% over the same period. ROE was at 34% TTM, even with the massive correction in 2021. In 2021 alone, it generated enough free cash flow to pay off 88% of all its debts. No wonder the company has beaten analysts' earnings and revenue expectations consecutively for the past 11 quarters.\nSo why did the shares of such a wonderful company decline 59% from its most recent 1-year high to close at $185 on 10 December 2021?\nDeclining growth led to negative sentiments\nZoom's growth is forecast (see graph below) to decline next year. The company received a consensus analysts EPS forecast of $4.40 for fiscal year 2022, a -9.28% decline from the $4.85 for the current year, after which it is expected to rebound by 11.02% in 2023.\nSource: FAST Graphs\nThese estimates are very similar to analysts' growth forecast collated by Yahoo! Finance (see table below), which projected a -8.8% decline in 2022.\nSource: Yahoo! Finance\nTo be fair to ZM's management, they had been transparent with their own conservative view of the business prospects. As early January 2021, management cautioned through the annual report that:\n\n Renewals of subscriptions to our platform may decline or fluctuate because of several factors, such as dissatisfaction with our products and support, a customer or host no longer having a need for our products, including any new customers or hosts that have subscribed to our services during the COVID-19 pandemic that may subsequently reduce or discontinue their use after the impact of the pandemic has tapered, or the perception that competitive products provide better, more secure, or less expensive options.\n\nSource:2021 Annual Report\nThe stock started trading in a downward channel soon after, despite the next four quarters of earnings beat.\nSource: Finviz.com\nThen, on the same day in the month of November 2021, ten analysts dropped ZM's price targets. Bank of America Securities led the charge with a 29.9% price target drop from $385 to $270. And the market reacted with a 16% drop in a single day. The slide continued till it closed at $185 on 10 December.\nTo add to the downward pressure, \"smart-money\" has been dumping ZM shares for the past year.\nSource: Author's own, using data from Morningstar\nMany fund and institutional investors have sold off their ZM shares, and most of these liquidated all or most of their shares.\nSource: Morningstar\nAlthough there were “smart-money” who purchased shares too, to be clear, there had not been new purchase of ZM shares by most institutional investors from 30 June 2021 onwards. And the few funds that bought ZM shares in the second half of 2021 were predominantly from ARK and T. Rowe.\nZoom dominates the web conferencing market\nThere are many competing web conference alternatives. In March 2020, ZM was still a small player in the United States with 13.62% of the fragmented web conferencing market. CISCO’s Webex and Microsoft Teams are among the strongest competitors with their own free versions.\nSource: Statista\nBut by October 2020, ZM's share of the US market had surged to the forefront at a massive 38.67%.\nSource: Wallstreetzen\nBesides the US, ZM also dominated the global web conferencing market with a whopping 36.2% market share.\nSource: Wallstreetzen\nBy June 2021, ZM had widened the lead to take over 50% of the market share.\nSource: Trustradius\nHow did the company zoom ahead of much more established companies?\nGreat products, loved by users, that even competitors need to integrate\nZM has been recognized as a UCaaS leader in Gartner’s Magic Quadrant since 2015.\nSource: Zoom\nAccording to the blog cited above, in Gartner's report ZM scored the highest for the Meetings and Service & Support in the Critical Capabilities for UCaaS. Worldwide.\nA check on Android PlayStore confirmed that the ZM apps are well regarded, garnering at least 4 stars.\nSource: Google Play Store\nThe company has a whole suite of products that they can upsell to their existing customers, to encourage them to upgrade to more premium offerings, including additional optional products that can be purchased as add-ons.\nSource: DNA-AV\nThis is useful for smaller businesses owners who may not want to subscribe to the enterprise account but they want services for ad hoc events. Or there are services that companies can consider adding on after testing zoom for a while. Such services are Audio Conferencing ($100/month), Large Meetings ($50/month), Cloud Storage ($50/month), and premier support packages to encourage upgrades to paid subscriptions. And customers are biting. ZM’s net dollar expansion rate for companies with more than 10 employees in 2021, 2020, and 2019 was above 130%, translating into 14 consecutive quarters of net dollar expansion rate above 130%. This shows that sales to the existing customers grew by 30% from 2020 to 2021. The company's total revenue in the third quarter of 2021 was $1.05 billion, up 35% year over year.\nAll the above demonstrates that customers are happy with the products and services, products which the company is continuously striving to improve, expand and enhance. ZM is investing more into R&D to develop better products. R&D expenditure has increased 14 times from $22 million in 2018 almost $300 million in 2021. Zoom is also acquiring businesses with the potential to value-add their existing products, such as the Kites GMBH's Machine Translation Technology that can help \"break down language barriers and making seamless cross-language interaction a reality of everyday life\". I can imagine having a video conference with someone who cannot speak in English but thanks to almost instantaneous and accurate translation of speech-to-text displayed as closed captions, we can still understand each other.\nZM's market dominance gives it a moat\nZM market dominance creates a network effect that forces their competitors like Google Workspace and Microsoft Teams to integrate ZM API into their own video conference interface in order to communicate with their clients who use Zoom. Thus, instead of replacing ZM, competitors have to \"use\" ZM.\nSource: Zoom App Marketplace\nFinancials\nZoom is in great financial state. The company has posted positive and growing EPS from September 2019 till date - up from $0.01 then to $1.11 in October 2021, or an 11,000% increase in 8 quarters. Revenue has risen 532% from $166 million to $1.05 billion in the same period. Its TTM EPS is $3.76 which is even greater than that of companies with larger market caps like UL ($2.33) and PFE ($3.50).\nFor the past 12 months, Zoom generated $1.65 billion of free cash flow. That alone is almost enough to pay off 88% of the company's $1.89 billion of total liabilities, not to mention that it is sitting on more than $5.4 billion in cash while generating $395 million in free cash flow just in Q3.\nSource: Q3 FY22 Earnings Presentation\nNew advertising revenue stream will be the next earnings growth catalyst\nZM has several hundred million users, and has decided to expand into getting advertising revenue from its free account users. With its dominant position both in the US as well as globally, this is the next natural step to take. This is huge, in my opinion. There are many successful companies that adopted a freemium business model to attract users, and after amassing a huge following, start selling advertisements. Facebook, YouTube, Google are among the most profitable businesses on earth that used this model.\nZM is starting this new revenue stream from a place of strength - it is already a cash flow positive and a consistently profitable company. Its only revenue stream now is centered around its subscription service and that is already highly profitable with gross profit margin of 72.8%. Once this new stream of revenue from advertisement enters its books, ZM will no longer be just a web conferencing platform but also a company that sell advertisements. The additional revenue growth from the advertising business will go a long way to make up for the forecasted decline in EPS growth.\nValuation: ZM is buyable now\nIs the ZM stock expensive at $185? After all, with growth expected to decrease in 2022, is ZM still a \"growth\" company that warrants a premium valuation? I will try to value ZM in three ways.\n1. Quick-and-dirty Method 1 with PE\nThis is the first of my back-of-the-napkin, quick-and-dirty valuation approach. Based on the projected full-year earnings of $4.87 in 2021, and assuming a more reasonable PE of 40 for a fast-growing company, a fair price for ZM could be around 40 x $4.87 = $194.80. At the current price of $185, this translates into a small margin of safety. I believe that starting a small position in ZM, say one-tenth the total amount you intend to invest in ZM at the current price is fine.\n2. Quick-and-dirty Method 2 with FCF\nZM's market cap as of 10 December 2021 is $55.2 billion. Its latest free-cash-flow TTM is $1.65 billion. Analysts think that ZM will grow 13.58% annually for the next five years. For margin of safety, I assume that the company has 0% growth in 2022, 5% growth in 2023, and 10% growth in 2024, 2025, and 2026, and I arrive at $1.94 billion of average FCF for the next five years. For a rate of return of 10%, a fair value market cap for ZM comes to $19.4 billion. Based on this current market cap, with 293,000 shares outstanding, I reached a fair value of $66. Based on this calculation, ZM is overvalued. However, I do not see the price retreating to 2019 level when EPS has increased 11,000% from $0.01 in Sep 2019 to $1.11 in October 2021.\n3. Discounted Cash Flow\nI used the following assumptions for revenue growth, profit margin, free cash flow margin, P/E and P/FCF to derive the possible intrinsic value of ZM.\n\nSource: Author's calculations, using the everythingmoney website\nIn my most bullish scenario, the intrinsic value of the share is between $209.70 and $289.24. And if the share price drops below $153.28, the price in the most probably mid-range scenario, I will load up the truck to own this money-printing machine. At the current price of $185, I believe that it is possible to initiate a one-tenth position in ZM, leaving some room to dollar-cost-average down if poor sentiments were to continue.\nTwo of the three different valuation methods used above suggest that ZM is currently slightly undervalued. However, all the valuation above and analysts' projections that were quoted did not take into consideration three things: the potential catalysts that can propel ZM's growth like the new advertising revenue stream, the development of value-added products from its recent acquisitions that can add value to the company, and last but not least the management's proven ability to beat the odds 100% of the time so far.\nConclusion\nI am bullish on ZM not because it is a hyper-growth stock. Sustaining the fast-pace of adoption of the company's services of the past two years cannot be a reasonably expectation for anyone. With the ever-increasing vaccination rates in developed nations and the lesser need for companies in making work-from-home arrangements, it will not be surprising to expect that earnings will decline next year. And at a 50% market share, it is near-impossible for Zoom to keep growing at the same pace as before. What is more important is to examine the business beyond 2022. Analysts expect EPS to grow by around 10-13% for the next 3-5 years, based on estimates taken from all three sources cited above (FAST Graphs, Yahoo! Finance, and Seeking Alpha).\nTo summarize, I am bullish because I see ZM as a profitable founder-led company that dominates its core market, has new potential revenue streams, consistent high net dollar expansion rate, and a huge and growing ability to generate more than $1 billion in free cash flow annually, and is able to keep growing EPS at a healthy 10-13% annually for the next 3-5 years. That is a rate of return that I am happy with. Investing with the crowd is the surest way to mediocre results. Just because everyone from retail investors to fund managers to institutional investors are dumping ZM shares, it does not mean that you have to. If anything, this negative sentiment has created an opportunity to own shares of this wonderful business.","kind":"news","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":699876343,"gmtCreate":1639786591946,"gmtModify":1639786592151,"author":{"id":"4093059407761700","authorId":"4093059407761700","name":"Dalang","avatar":"https://static.tigerbbs.com/9884b0395e7dd457fb8aa5df567c286c","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4093059407761700","authorIdStr":"4093059407761700"},"htmlText":"Interesting","listText":"Interesting","text":"Interesting","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/699876343","repostId":1170036266,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":699187581,"gmtCreate":1639756266631,"gmtModify":1639756843487,"author":{"id":"3579331938591706","authorId":"3579331938591706","name":"JOHY","avatar":"https://static.tigerbbs.com/01faff4217bc5e19fd6b5d62c156f678","vip":1,"crmLevel":4,"crmLevelSwitch":0,"idStr":"3579331938591706","authorIdStr":"3579331938591706"},"htmlText":"Oh","listText":"Oh","text":"Oh","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/699187581","repostId":1170036266,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":699013728,"gmtCreate":1639720924668,"gmtModify":1639720924668,"author":{"id":"4094719956261220","authorId":"4094719956261220","name":"NormanB","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"4094719956261220","authorIdStr":"4094719956261220"},"htmlText":"This is insightful","listText":"This is insightful","text":"This is insightful","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/699013728","repostId":1170036266,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":699019297,"gmtCreate":1639720686307,"gmtModify":1639720686490,"author":{"id":"4089878444731060","authorId":"4089878444731060","name":"Adrian88","avatar":"https://static.tigerbbs.com/e6c821844139b158ef20aa398c55abd1","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4089878444731060","authorIdStr":"4089878444731060"},"htmlText":"ok","listText":"ok","text":"ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/699019297","repostId":1170036266,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":39,"commentSize":4,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1170036266"}