revisiting Zoom (ZM)

A friend mentioned the other day that Amazon has canceled its Glow communication service less than a year after making it available. Glow’s gimmick, if that’s the right word, was to involve kids in family video calls.

This prompted me to take a look at ZM for the first time in a long while.

my “before” thoughts

My view on ZM and Roku (ROKU), for that matter, has been that these are quintessential stay-at-home stocks, with an iffy future in a post-pandemic world …but being priced as if that uncertainty were not an issue.

I do think Zoom + the pandemic have made a fundamental, lasting change in the way people communicate with one another. 

My worry has been that although the service is the best around, I’m not convinced the company will be able to get many new entities to pay $15 a month or so for it.  Governments are already committed to Cisco’s Webex, and Google and Microsoft have corralled most big companies.  The latter two also have free services for individuals. Those may not be very good, but they act as a cap, I think, on what ZM can charge before customers will defect to an inferior, but free, alternative. And any religious or civic organization likely to use Zoom has probably signed up a year or more ago. 

what I found

the obvious: ZM is down by about 85% from its 11/20 high, and is now trading at about 25x trailing earnings.

the financials:

–They’re hard to read, which is the case with any youngish tech company that compensates many employees largely through restricted stock unit grants.

–ZM has about a quarter of its market cap, or about $5.5 billion, in net cash

–The value of RSUs is listed as an expense on the income statement, usually on the research and development and sales and marketing lines, even though there’s no cash outlay. In the case of ZM, the value of such issuance has doubled yoy, presumably because grants made a year or two ago may well expire worthless.

–Tp me, this makes the revenue line (up about 8% yoy) in the income statement more important for analyzing companies like ZM than it would usually be.

–And it makes the cash flow statement much more essential reading, since it explicitly identifies this kind of non-cash charge. ZM’s shows the company to be operating at roughly breakeven on a cash in – cash out basis, after spending $425 million so far this fiscal year repurchasing its own stock. Put another way, the company seems to me to be using all the net cash flow it generates for stock repurchases.

competitive advantages?

I had the misfortune to be on a Webex call recently, where I had to phone the other party to get audio. It might be that CSCO, MSFT and GOOG are not as good as ZM because their services are built on top of inflexible 30-year (or so) old code. I have no idea. But, if so, maybe these competitors can’t get any better at a cost they could justify. That would be a plus for ZM.

my bottom line

The company is doing better than I would have guessed. 25x earnings is also a better bargain than 160-ish x earnings at the 11/20 high of $478. There’s also the makings of a bullish story–the hope that revenue gains accelerate next year and/or expense growth abates, with the result that eps rises sharply, driving the stock higher.

I have no idea whether this is just hope or the glimmer of a more promising story, so I choose not to bet. The surprising thing for me is that, unlike two years ago, when the price was prohibitive, one can sort-of, kind-of, maybe make a case for owning the stock. That’s considerably better than I’d expected. At the same time, this suggests to me that maybe the entire market’s fundamentals are better than the consensus expects or that current prices reflect.

One response

  1. Re lasting changes in the way people communicate, I recently noticed that my associates were remaining in their offices on Zoom during internal conferences rather than stepping a few yards to a conference room. They were also multiprocessing—which they couldn’t have done in a conference room.

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