Zoom (ZM) provides a simple-to-use video conferencing service that can be used for things like teleconferencing, distance education, and online social meetups.
Basically, it’s used for what we used to use Skype for.
Perhaps a good topic for a business school case study would be how Skype got absolutely pulverized in such a short period of time after being the go-to video conferencing platform worldwide.
After dethroning Skype from rule over the video-conferencing world, Zoom has benefited immensely during the recent pandemic since its service has transitioned from just nice-to-have, to a necessity for many organizations.
As a result, Zoom’s stock price has zoomed upward, pun very much intended, during the pandemic.
In fact an investment in Zoom would have quadrupled in value just in the past 6 months.
Now the question that suggests itself here is: is it too late to hop on the Zoom gravy train or is there still some meat left on the bone?
At a share price of close to $250 imputing a market cap of ~$72 billion, Zoom’s price-to-sales ratio is ~91.
It has a forward P/E of 204.
In comparison, Salesforce, another software as a service provider has a price-to-sales ratio of ~9 and a forward P/E of 62.
So on the face of it Zoom’s valuation seems like it’s in banana land.
However, when you’re dealing with a growth stock, it is more relevant to look at the PEG ratio (Price/Earnings/Growth) which takes into consideration the expected growth of the company.
In the case of Yahoo finance’s PEG ratio which takes into account the expected growth over the next 5 years, the PEG ratio for Zoom is 3.46 which is comparable to the PEG ratio of 3.12 for Salesforce.
So Zoom’s valuation may not be in banana land proper but it is on the border talking with a custom’s officer.
Is Zoom a buy?
While Zoom has a rich valuation, I am not against paying a premium for a great company that is churning out a profit and has a great profit margin with a lot of room to grow.
Here’s my problem with investing in Zoom given my investing time horizon is around 3 years:
Video conferencing is increasingly becoming a commodity.
Anyone can do it.
Facebook is doing it, Google is doing it, Cisco is doing it and I’m sure others will too.
There is no real proprietary technology specific to Zoom or impressive technological feats that Zoom has accomplished.
What Zoom has done exceptionally well is execution.
It has a really simple, easy to use interface with some cool features like changing the background behind you. Granted. I like the product.
But how do you protect this business?
What is the moat that Zoom has around its model?
I opened a Zoom account and was having my first Zoom meeting in literally 2 minutes.
Similarly, I can use a different service just as fast.
Managing BFF, I am frequently talking with investors and customers on video chat.
I’ve used the Cisco video conferencing, it was good.
I’ve used google hangouts video conferencing, it was good too.
The point is, I don’t have any strong preference for using Zoom’s video conferencing compared with Google or Cisco’s platforms.
Anyway, it’s just a few clicks you’re interacting with the tool and then once the video is working you forget which tool you’re using.
If someone in BFF told me they were going to use a different messaging system than Slack they would get a lot of pushback from me and would face alot of inertia to change.
I don’t think the same resistance would be displayed if an alternative to Zoom was suggested.
Unless I sense a strong resistance amongst Zoom customers to switching to a different service or some sort of proprietary technology or technological advantage that Zoom has compared to competitors I simply wouldn’t feel comfortable paying a valuation that assumes really high growth for many years to come.
It may turn out to be a great investment but at these prices it’s not clear to me that it will given the ease of entrance for competitors.
So I’m staying away for now.
As far as halalness goes, there is obviously nothing wrong with its business model and it actually has very limited dealings with interest so I have no qualms with investing in Zoom from a religious standpoint.
Bottom line, I think there are more compelling investment opportunities out there.
If you’re looking to get started investing I suggest you try out M1 finance, it’s a completely free service.
If you earn more than 200K annually and would like to invest some money with me and gain access to an asset class that you really can’t get anywhere else, check out fundmebff.com and apply to become an investor.
Disclaimer: Rakaan Kayali owns no positions, long or short, in Zoom (ZM) and has not affiliation with the company.
Disclaimer: This is not meant to be personal financial or investment advice. Make sure you do your own due diligence before you make any investment decisions. Never invest money you can’t afford to lose.