Being part of an initial public offering (IPO) can be exciting and profitable. This event for Zoom Video Communications (ZM -1.01%) was no exception. This video communication platform joined the public markets with a wave of interest due to its triple-digit growth rates and positive bottom line. IPO investors are certainly richer today, but before we find out how much richer, let's take a quick look at the history of this popular video meeting platform.
A better way to do meetings
Eric Yuan was one of the founding engineers for WebEx, one of the early video meeting hosting services. As the service grew, it seemed like every customer he talked with was frustrated and unhappy with the product. Even when Cisco bought WebEx and he became VP of engineering, he was embarrassed by the product's customer reception and wanted to do better. He ultimately left to build a solution from the ground up.
With Yuan's history, it's not surprising he founded Zoom with the goal of making its meetings better than in-person meetings. The company's product literature explains that it is a "video-first communications platform that delivers happiness and fundamentally changes how people interact." The idea that happy customers drive revenue growth has turned out to be a winning formula.
|
Metrics |
Q4 FY2020 |
Q1 FY2020 |
Q2 FY2020 |
Q3 FY2020 |
|---|---|---|---|---|
|
Revenue |
$106 million |
$122 million |
$146 million |
$167 million |
|
Revenue growth YOY |
108% |
103% |
95% |
85% |
YOY = year over year. FY = fiscal year. Data from company earnings presentation.
In addition to a track record of impressive revenue growth, it's creating loyal customers. Its trailing-12-month net dollar expansion rate is 130%, meaning that customers are spending 30% more this year than they did the year before. This aligns with customer reports in which 85% see an increase in video usage and 92% experience increases in employee performance.
The company is executing well, and its IPO shareholders have benefited.
Show me the numbers
As its public debut approached, Zoom raised the range for its initial pricing and then ended up pricing its shares over that range at $36. Setting this initial price is a fine balance. The goal is to set the offering price close to market price so a company can maximize the cash it receives but not so high that IPO shareholders start with losses.
It turns out that even with the higher price, management still underestimated the demand for its shares, and the company left money on the table. During the first day of trading, Apr. 18, 2019, the stock spiked up 80% and eventually settled at $62, a 72% premium to the IPO price. The stock continued to rise over the summer, topping $100, but has dropped back to around $66 as 2019 comes to a close.
Image Source: Getty Images.
For the IPO investor who bought 278 shares, a total of $10,008, those shares have zoomed up 83% to $18,348. This is an incredible market-beating performance versus the S&P 500 index, which only gained 13% over the same period.
Unfortunately, public investors, like myself, haven't fared as well. The stock has been a roller coaster ride but never provided an opportunity to buy below the IPO price. A public investor with perfect timing could have bought at the low, just under $60, and would be sitting on a gain of around 10%. Most other investors are in the red, but it's still early for this young upstart.
A world of opportunity ahead
Zoom has a significant opportunity to grow. Its platform is wonderfully scalable and can serve clients ranging from small businesses to large enterprises. Small companies can sign on for as little as $14.99/month for each person who hosts video meetings. For large businesses, it can extend its basic service with a mobile device or laptop to physical devices for the phone on your desk and meeting-room setups. This holistic enterprise solution makes it easy to connect employees via video no matter where they are. The company has been successful in winning big clients and upselling existing ones. Last quarter, the number of customers who paid more than $100,000 annually for Zoom's services grew 97%.
This meeting platform hosts 74,100 customers that have more than 10 employees. With an estimated 200 million businesses globally, Zoom has less than 0.4% market share and a huge opportunity for the taking. Whether you are an IPO shareholder or a recent investor in Zoom, that should make you happy.
