A new series covering companies in the Compound 8 to 80 Portfolio…
1) Why is Zoom an 8 to 80 Brand?
2020 was the year that Zoom became a verb, providing an easy-to-use service that became an essential part of everyday life.
Last April, daily Zoom meeting participants surged to 300 million, up from just 10 million in December 2019.
Now operating in over 40 countries around the world, Zoom has quickly become a global brand with users in every generation, from 8 to 80.
2) What are its growth and financial trends?
Zoom last reported earnings on March 1, 2021.
They continue to be one the largest beneficiaries of the covid-induced transition to a stay-at-home economy.
Revenues hit a record $883 million during Q4, up 369% over the prior year.
The revenue growth rate outside the Americas (Asia/Europe/Middle East/Africa) of 687% was more than double the growth in the Americas (292%).
Net Income also hit a record of $260 million, a 1,633% increase from the 4th quarter of 2019.
Zoom also reported 467,100 customers with more than 10 employees, a 470% from the same quarter of 2019 (source).
Even with this incredible growth, Gross Profit Margins remain high at 69.7%.
During their quarterly call, Zoom highlighted the significant growth in Zoom Phone, up 269% YoY for companies with more than 10 employees.
Zoom sees a massive opportunity in telephony going forward as companies look to modernize their phone systems to an integrated communication platform…
3) The Climb
The story of Zoom is one of perseverance and grit, starting many years before the creation of the company.
Born in China, founder Eric Yuan was inspired by a speech from Bill Gates and wanted to come to the US in the late 1990’s to gain exposure to the growing internet revolution in the US.
Yuan was denied a visa 8 times over two years, and was finally successful on the 9th attempt.
In the US, he started as a coder at WebEx (later acquired by Cisco) because he “could not do anything else” and “did not speak the language.”
By 2011, Yuan has risen up the ranks at Cisco (making “very high six figures”) but left that comfort behind to pursue his dream of building a “user-friendly mobile product” that “would make customers happy.”
40 engineers from Cisco left with Yuan to found “Saasbee”, raising $3 million in seed funding.
With Apple’s FaceTime just launched and popular Skype and WebEx competitors, “many professional investors expected a very low probability of success for another new-comer and turned down the opportunity.”
But Yuan was undeterred, and in May 2012 he changed the name of the company to Zoom on the advice of Jim Scheinman (an early investor who had fell in love with the name years earlier as it was in one of his kids’ favorite books – “Zoom City”).
In late 2012, the new “Zoom” landed their first paying customer (Stanford University), and by May 2013 they already had one million participants.
From there, Zoom continued to focus maniacally on customer happiness, creating an easy to use product that “just works” (good interview with Yuan here).
Zoom went public in April 2019 at a valuation of $9 billion. By October of 2020, its market cap had risen to over $160 billion.
Few companies in history have achieved a $100 billion market in a shorter period of time (less than 10 years). But then again, few companies become a verb.
4) What are major risks to future growth?
Zoom has a number of formidable competitors in the video conferencing space, including Webex (Cisco), Meet (Google), Teams/Skype (Microsoft), RingCentral, GoToMeeting (LogMeIn), and more. Zoom will have to continue to innovate and satisfy it customers to stay ahead of the competition.
From a stock perspective, valuation is the primary concern, as is the case with many high growth tech companies today.
Trading at over 38x sales, current expectations for future growth are extremely high, making Zoom vulnerable should it fail to meet or beat these lofty expectations.
As the end of the covid-19 pandemic nears and employees return to offices and students to schools, Zoom will be faced with additional challenges as it seeks to not only retain its customer base but also continue to grow.
No one knows what that transition will look like as we’ve never been in this situation before. Video communication will continue to be an important part of our future, but in the near term the rate of growth is going to slow. They question for investors is by how much and whether Zoom can continue to add value in a post-pandemic world.
5) Howard’s Take…
“Zoom continues to show signs of resting…not the company, but the stock. Nobody can value this stock because it is growing too fast and the use cases keep expanding. Om Malik had a great take with his piece ‘Why We Are Underestimating Zoom’ which really sums up the big picture.
There will always be very smart people that will write about their lack of a moat and high valuation like Packy McCormick does here in a well reasoned piece on why he does not own Zoom.
What makes it a great 8-80 company is the brand and it helps to be founder led. While Zoom may not have a ‘moat’ in terms of web video, it does own the conversation and it is the go to communication product of today. I believe only Zoom can beat Zoom.” – Howard Lindzon
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