Shares of video-conferencing company Zoom Video Communications (ZM +8.05%) are up over 10% in the past month as investors cheer robust top-line growth. In the third quarter of fiscal 2020, it reported an 85% jump in revenue year over year, driven by a customer base that grew 67% over the same time frame. To keep up with this kind of demand, Zoom is on a hiring spree. It now employs over 2,400 people -- up nearly 10% quarter over quarter.
While this is superb growth, the situation presents a potential problem for Zoom. As previously noted, this company has an intentional focus on happiness. In conscious capitalism fashion, it seeks to ensure that its employees are happy and that its customers are happy -- which could provide stellar business performance resulting in happy investors. But preserving company culture is challenging amid fast change, and investors should frequently check in with Zoom to see how it's maintaining its focus.
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Checking in on customers
While Zoom grew customers 67% over the past year, that's not exactly a great measure of customer satisfaction. It's more indicative of a good sales team. Customer satisfaction is better tracked by watching the net dollar expansion rate. This fancy term just tracks existing customer spending. A rate over 100% means that customers are staying and spending more than last year. For Zoom, its net dollar expansion rate in fiscal Q3 was over 130% for the sixth consecutive quarter.
Zoom customers are spending more for two main reasons. First, while Zoom has over 74,000 customers, not all of them have deployed Zoom's technology across their entire enterprise. Management says that most start in just a small part of the company, but when they see that the product "just works," they are encouraged to deploy Zoom throughout the rest of the company. It doesn't happen all at once.
The second reason customers are spending more on Zoom is due to the launch of Zoom Phone. Business phone systems are typically internal company infrastructure, but more companies are looking to outsource this service to Zoom so that phone and video can integrate together. Zoom Phone is still in the very early innings, but if it's successful, it will keep the net dollar expansion rate high for the next few years at least.
One final note about Zoom customer happiness: Its customers are asking for SMS (texting) to be a part of Zoom service offerings. It wasn't the original plan, but Zoom is moving forward in this area anyway. It's clearly listening to customers, and that bodes well for business.
Checking in on employees
Tracking employee happiness is more challenging, but companies like Glassdoor and Comparably can provide some insight. In December, Glassdoor released its list of top places to work in 2020. This list features 100 companies, and Zoom ranked in the top five in 2018 and 2019. Somewhat troubling, Zoom dropped completely off the list in 2020.
There may be a simple explanation for the fall. Glassdoor's methodology for generating the list includes a minimum number of employee reviews during the period to qualify for consideration. Glassdoor still ranks Zoom very high in key metrics. For example, 96% of Zoom reviews approve of CEO Eric Yuan, and 92% would recommend working at Zoom to a friend. Similarly, 98% of reviews on Comparably are positive. Zoom falling off the list of top places to work may be as simple as not getting enough reviews during the period to be eligible.
It's worth noting that within Glassdoor's five-star rating system, Zoom currently sits at 4.6 stars. Last year it enjoyed a 4.8-star rating, so it has fallen slightly. But 4.6 stars is the same rating the top five companies have on Glassdoor's list of top places to work. So while investors should keep a finger on the pulse, the heartbeat of the company appears to still be ticking strong.
Future investor happiness?
Zoom seems like a great company. But I've questioned how great of a growth stock it can be due to its total addressable market (TAM). The company puts the unified communications market at $43 billion, which sounds big. But investors shouldn't expect any company to grab 100% of an addressable market no matter how great it is. And Zoom's market capitalization currently sits close to $20 billion, leaving me to question how much upside there can be from here.
But my growth concerns may be premature. In the Q3 earnings call, an analyst asked about business beyond the unified communications market. Management replied that the focus right now is squarely on video and audio products. But it's already thinking about offering artificial intelligence and real-time translation products down the line, meaning that the $43 billion TAM is just the floor, not the ceiling. If it does expand into new areas, the growth concerns will be eased.
