By Geoffrey Smith and Kim Khan
Investing.com – As parts of the globe begin to ease lockdown rules, with news cases of Covid-19 waning, it’s a good time to take stock of some of the companies that benefited from the new landscape.
Among the most well known of these quarantine stocks is video teleconferencing software provider Zoom (NASDAQ:). Shares have doubled since the start of the year as companies across the globe adopted it to replace the office meeting room. As economies attempt to revert to past productivity, is Zoom still a good bet or will it fall back to earth?
Geoffrey Smith argues that Zoom has risen too far, too fast, while Kim Khan argues that if you say “Zoom” instead of “video meeting” you know how the landscape has changed and it’s attractive for the long term.
The Bear Case
The bear case for Zoom is that it has simply gone too far, too fast. Not just in terms of valuation metrics, although at over 50 times trailing 12-month revenue and 1,500 times earnings, the company is twice as expensive as Slack, another ultra-trendy alternative communications stock.
Zoom’s user numbers for the first quarter will obviously look stellar. CEO Eric Yuan has been quoted extensively as saying that they grew from a maximum of 10 million daily to over 200 million within a couple of weeks as lockdowns spread across Europe and North America.
But how much of this can Zoom turn into cold, hard cash? The first question a potential investor should ask themselves is – how much have you paid so far to use Zoom? If you’re just using it as an individual, the answer is very probably “nothing”.
Even if it isn’t, how much would you be prepared to pay to use Zoom in a world where Apple’s FaceTime, Google Meet and many others are available for free? What, about the company, is truly unique? Remember, the pandemic that made Zoom will also leave us with no spare cash to throw around on services that we can get for free elsewhere.
Which leaves business customers. These, in fairness, have already helped to make Zoom profitable, in contrast to Slack. But the bear argument says that the company has already lost crucial trust from this segment with its by now well-documented security flaws. Regaining it will be hard, perhaps impossible.
For school boards organizing remote teaching, a single naked zoombomber exposing himself is one too many. For companies like Daimler (DE:), the routing of data through servers in China fatally compromises its confidentiality. For government agencies from the U.S. Senate to the Indian and German governments, the thought of those Chinese servers and the crass monetization of data by forwarding it to Facebook (NASDAQ:) (Facebook!) has made it an immediate no-no.
Yuan has dismissed these mis-steps as bugs in the business model, but the bear case says they are features, a reflection of an all-too familiar Silicon Valley mentality that places no value on data privacy and indulges its desire to maximize revenue without restraint.
The company has given itself 90 days to fix its security problems. Investors should exercise extreme caution if it continues to generate negative security on this issue thereafter.
The Bull Case
Zoom Video Communications is facing what all trendy stocks – and indeed all trends – go through at some point: backlash.
Zoom has been the stock of the lockdown era and, as it reached what many have called an absurd valuation, it’s facing intense scrutiny.
Looking at the stock right now it’s clear the valuation is through the roof. Technical indicators are screaming short-term sell as well. It’s had an amazing run, but whether it’s still got plenty of long-term potential if you believe Zoom has had a transformation moment. And there’s a good case to be made that it has.
Zoom has become part of landscape, with the its name so synonymous with video conferencing people simply say, “Let’s Zoom.” That’s something that Facebook and Microsoft (NASDAQ:) can’t encroach on (like when Bill Gates brought out the Palm PC).
Years from now we may be talking about a Baby Zoomer generation.
And the landscape will be different when the economy reopens, making video conferencing and working from home more standard practice.
Despite the confidence from the White House, the United States and Europe are just starting to change their rules. Localities could quickly be back on lockdown at the sign of infections rising and speculation about a second wave will also leave businesses hesitant to revert to how things were pre-pandemic.
Many employees and employers will see the advantages of telecommuting, at least a couple of days a week, and with school closures extended and childcare harder to come by it will be necessity for some.
Business air travel should also decline, not just for safety reasons, as airfares jump and leaner carriers fly fewer routes.
Moving from the broader trends, Cantor Fitzgerald, earlier this month, initiated its coverage of Zoom with an overweight rating, noting they expect “the virus to provide upside to estimates and for the platform and its products to drive increased market penetration and future cross-selling opportunities.”
Earnings projections are strong. Analysts, on average, expect that revenue will rise to about $930 million for the current fiscal year, up 49% from $623 million a year ago.
Fiscal 2022 revenue is seen climbing a further 34% to $1.25 billion.
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