If ever there was a fitting name for a hot IPO, it's Zoom Video Communications (NASDAQ:ZM). After pricing its initial public offering at $36 a share in mid-April, the stock is trading for more than twice that as of this writing. Zoom indeed!
Already there's been much debate about whether Zoom stock is worth the price. That's a tough question to answer because a lot depends on just how disruptive Zoom technology is now and can be in the years to come. There's only one way to get a read on that: by studying how well (or poorly) Zoom's competitors are faring. We can break them out into two distinct buckets.
Cisco Systems (NASDAQ: CSCO), which acquired WebEx -- where Zoom founder Eric Yuan was then working -- more than a decade ago, could have had the essential elements of what became Zoom had executives let Yuan pursue a new and different vision for WebEx. Cisco refused; Yuan went on to found Zoom and take roughly 40 engineers with him to his new start-up. He's never looked back, and corporate videoconferencing is better for it.
Don't tell Cisco that, though. Or Microsoft (NASDAQ: MSFT), for that matter. According to Gartner's latest Magic Quadrant for Meeting Solutions, Zoom is roughly on par with both companies in terms of vision and quality of execution. And that's today. Gartner's "strategic assumptions" for the space predict that 65% of meeting-solutions users will take advantage of voice over Internet protocol (VoIP) embedded within their conferencing package. Here's why that matters.
Zoom makes it as easy to dial a phone number from a "Zoom Room" as it is to run a videoconference. Zoom Rooms are rooms with a TV, computer, and special camera for starting and hosting Zoom meetings. The reason is Zoom is built for internet communications, so VoIP calls are connected just as seamlessly as chat sessions or video calls.
By perfecting video and then layering features on top, including voice and chat, Zoom appears to be benefiting from solving the hardest problem first. Or at least that's what the numbers say. Revenue has more than doubled in each of the past two years while also producing higher gross margin (up from 79.5% to 81.5%). Disruption of the market that's long been dominated by Skype, WebEx, and GoToMeeting is well under way.
Corporate contact centers
Zoom also provides more than videoconferencing. The company has integrations with Twilio and Five9 that bring Zoom Phone voice tech into each company's contact center suite for outfitting whole teams of customer service agents and competing with legacy providers that offer "unified communications" serving whole teams of customer service agents. Meeting solutions like Zoom are meant for orchestrating lengthy, detailed conversations over video primarily and voice or chat if needed; contact centers are built to handle as many calls and chat sessions are possible, as cheaply and efficiently as possible. In teaming with Twilio and Five9, Zoom is helping to create a more modern and potentially cheaper alternative to well-established unified communications suppliers 8x8 (NYSE:EGHT) and RingCentral (NYSE:RNG) to understand the implications.
Founded in 1987, 8x8 started in the chipmaking business and by the early 1990s had become one of the first to make chips for the videoconferencing market it still serves today, but with a more diversified product set. These days, the company specializes in delivering unified communications over the internet. RingCentral has a similar history, having been founded in 1999, but is more grounded in internet telephone and fax. Neither is growing nearly as fast as Zoom, but they're also doing far better than their ages would suggest.
RingCentral has improved revenue by over 30% in each of the past two years, while 8x8 grew 17% in fiscal 2018 and is up more than 19% over the trailing 12 months. I'd expect rapidly decelerating growth for both companies were Zoom-powered contact centers from Twilio and Five9 winning on a bigger scale. The corporate contact center landscape may change in a year or two, though.
The Foolish bottom line
Zoom stock is trading for a stratospheric premium, but not without reason. The company is already proving its disruptive potential in the corporate videoconferencing market, and the contact center market may not be far off. Either way, it's easy to see this business continuing to grow by leaps and bounds for the next several years, throwing off tens of millions in cash flow in the process. Bet against this stock at your peril.