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Has Zoom Stock Peaked?

Posted on Friday, Jun 5th 2020
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The current Covid crisis has been particularly beneficial for online video conferencing player Zoom Video Communications (Nasdaq: ZM). With organizations, both small and big, and educational institutions globally resorting to remote working and remote learning techniques, Zoom’s revenues have grown to record highs. The market is pleased with the company and its stock has soared more than 200% since January this year.

Zoom’s Financials

Revenues for the first quarter grew 169% to $328.2 million, shattering the market’s forecast of $202.7 million. The growth in revenues came at a high cost. Zoom’s cost of revenues grew 330% to $103.7 million, dropping its gross margin to 68.4% from 80.2% the previous year. The market had forecast gross margins in the range of 79%-81%. The increase in costs were linked to the growing concerns on safety of the service. Due to several security issues, Zoom had to incorporate several upgrades during the quarter. Its spend on data centers and cloud services also increased significantly due to the surge in usage. Excluding items, Zoom reported an EPS of $0.20, again beating analysts’ estimate of $0.09.

Among key metrics, Zoom now has more than 265,400 customers with more than 10 employees, recording a growth of 354% over the year. Customers contributing more than $100,000 in trailing twelve month revenues grew 90% to 769.

Driven by the current conditions, Zoom improved its guidance for the rest of the year. It forecast revenues of $495-$500 million for the second quarter with an EPS of $0.44-$0.46. It expects to end the current year with revenues of $1.775-$1.8 billion and an EPS of $1.21-$1.29. The market was looking for revenues of $224.4 million for the quarter and $939.7 million for the year.

Zoom’s Phone Focus

Earlier last year, Zoom had expanded its offerings with the launch of Zoom Phone, a cloud-based phone system for companies. The company continues to push the device forward amid the current conditions. While the company did not get into specifics, it reported a significant increase in the usage for Zoom Phones. Zoom plans to cross-sell the Phone to its fast-growing base of business customers. It has already been marketing Zoom Phone with its video product Meetings, which is already focused on business customers. In the coming months, Zoom is expected to continue to add features to the phone to drive more traction as it expects the Phone business to grow.

Zoom’s Growing Competition

While the crisis has surely helped Zoom, it is not the only video conferencing player to benefit from the conditions. In April this year, Facebook expanded its Messenger app with a new feature – Messenger Rooms. Messenger Rooms allow Facebook users to convert their conversation from an IM to a live video call. Up to 50 users can participate in calls and users can set up private “rooms.” The meeting host has the ability to lock the rooms, limit time, and manage visitors to the video call. Additionally, Facebook has added some of its fun features such as filters and masks to make these video calls more lively.

Besides the Messenger, Facebook is also pushing forward its enterprise-focused Workplace Rooms. Similar to Messenger Rooms, Workplace Rooms are geared towards professional setups allowing organizations to conduct collaborative video and audio sessions remotely.

Not to be left behind, enterprise software companies Google and Microsoft have also been pushing their video services. Google Meet can handle up to 250 live participants and provides live streaming of upto 100,000 viewers within a domain. Users can record Google Meetings and subsequently broadcast them to the audience or save them on Google Drive for future reference. Then there is Microsoft Teams which is already included in Microsoft’s Enterprise offering and allows for one-on-one video chats, file sharing, and other Microsoft tool integrations. For instance, Teams allows users to jump onto a video call directly from a chat message thread.

Zoom’s current success is largely attributed to the fact that it is easy to use and does not even require users to sign up to access a meeting. Google and Facebook require a Google or Facebook account to begin a conversation. But Zoom’s biggest problem has been the recent surge of security and privacy issues. Zoom claims to have addressed them and is continuously monitoring its service to ensure its security is not compromised.

The current crisis is here to stay. It will still be a while before offices and educational institutions can move away from virtual environments and players like Zoom will continue to see growth in the coming months. But it will be interesting to see what Google and Facebook’s free services would do to Zoom’s sudden surge.

Its stock is currently trading at $208.08 with a market capitalization of $63.1 billion. It was trading at a 52-week low of $60.97 in December last year. It had soared to a record high of $224.46 earlier this week. Zoom went public last April when it raised $751 million at a valuation of $9.2 billion and list price of $36. Prior to listing, Zoom had raised $160.5 million in funding from investors including AME Cloud Ventures, Emergence Capital Partners, Horizons Ventures, IT-FARM, Qualcomm Ventures, Maven Ventures, Sequoia Capital, Bart Swanson, Bill Tai, Carmen Elizabeth Sanchez C., Dan Scheinman, Matt Ocko, Mike Everett, Patrick Soon-Shiong, and Subrah Iyar (founder of Webex). Its last private funding round was held in January 2017, when it raised $115 million in a round led by Sequoia Capital that valued it at $1 billion. What a meteoric rise it has been for the company!

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