What happened
Shares of Zoom Video Communications (ZM +1.27%) jumped on Monday, adding to the massive gain the stock racked up on its first day of trading last Thursday. The market is still buying the hype around Zoom's growth story, pushing the stock up 6.7% by 3:40 p.m. EDT. Shares were up as much as 11.1% earlier today.
So what
Zoom is certainly growing fast. The subscription software company more than doubled its revenue in fiscal 2019, which ended on Jan. 31, to $330.5 million. That's up from just $60.8 million two years ago.
Image source: Getty Images.
Zoom is also profitable on a GAAP basis, which is not common among fast-growing software-as-a-service companies. Zoom reported net income of about $7.6 million in fiscal 2019, and it was very nearly profitable in the two preceding years.
Zoom sees a massive opportunity. It expects its total addressable market to expand to $43.1 billion by 2022, giving it a long growth runway. The market is buying into that story, awarding Zoom a sky-high valuation.
Now what
Zoom is now worth more than $16 billion, equivalent to about 50 times fiscal 2019 sales. That's a very generous, and very optimistic, price-to-sales ratio.
The company faces a slew of competition, from established companies like Cisco and Microsoft to upstarts like Slack. Zoom included a long list of advantages that its various competitors enjoy in its S-1 filing:
... such as greater name recognition; longer operating histories; more varied products and services; larger marketing budgets; more established marketing relationships; third-party integration; greater accessibility across devices or applications; access to larger user bases; major distribution agreements with hardware manufacturers and resellers; and greater financial, technical, and other resources.
While the market is overwhelmingly positive on Zoom today, the first sign of trouble could send the richly valued stock tumbling.
