Amidst the chaos of the coronavirus crisis, a small group of companies actually seem to be benefiting from global economic turmoil. We all know well-established members of the group from Amazon to Clorox that are exhausting company resources to meet record demand. Alongside these more established organizations, high flying growth stocks including video chat company Zoom (NASDAQ:ZM) should be considered.
Some Wall Street figures like Jim Cramer consistently pound the table on the company, preaching the long-term implications of being forced to stay put. So many pundits believe the pandemic stock boom is here to stay, pointing to the abrupt change in our lives to accelerate the evolution of workflow. While I respect his opinion, I do not share it.
Priced For Perfection
When trying to stomach Zoom's extreme valuation, current metrics already value the company for perfection. The technology company's 64 times price to sales multiple (a ratio of their market cap to revenue) is expensive to say the least. The company did double sales from 2019 to 2020, but with that valuation I would hope they did.
Crowdstrike, a member of the same technology IPO class as the video chat company, depicts just how generous Zoom's pricing is. Crowdstrike grew sales by 92% the same year Zoom doubled theirs: a similar performance. The marginally lower growth rate is greeted by a price to sales multiple of 29, less than half of Zoom's. The egregious sales multiple premium doesn't guarantee Zoom won't continue to go up. What it does indicate is how much success and good news is already reflected in the valuation.
Can this success continue?
When analyzing the commentary from other prominent software service companies like Snapchat and Netflix, more concerns loom. Both company's executives pointed to the pandemic as a source of their accelerating revenue growth; Zoom has too. What they also alluded to, however, was how the pandemic pulls forward future revenue growth by accelerating digital and remote trends. Both expect more muted sales growth immediately following the pandemic. It's quite reasonable to assume the same growth trajectory for Zoom going forward. I do not believe this threat has been adequately contemplated by investors.
Beyond the sky high expectations, direct mega cap competition may put a ceiling on growth potential. Zoom does have a cash position of nearly one billion dollars to dedicate toward expansion. CEO Eric Yuan continuously talks this up, pointing to the company's strong liquidity as evidence of ability to continue investment. In a normal competitive landscape, this would be satisfactory; Zoom does not operate in a normal competitive environment. Yuan, instead, competes with multiple mega-cap technology companies with fortress balance sheets.
Facebook recently upgraded FaceTime to rival Zoom, Google made their video chat service free, Microsoft revamped skype, and Cisco continues to aggressively pursue their own competing service: WebEx. To top it all off, Verizon just purchased Blue Jeans, yet another competing product. If you were to give me a worst-case scenario competitive landscape, it would resemble Zoom's. All five of these companies are capable of massive spend to grab market share. Beyond this, recent security blunders at Eric Yuan's organization further weaken Zoom's competitive edge.
More trouble on the horizon
Privacy issues hinder Zoom's ability to most effectively compete in this crowded space. Google recently banned Zoom due to privacy issues. I take this with a grain of salt, as Google has another incentive in the form of attracting consumers to their own platform. What I do take more seriously, is the US Military and German Federal Foreign Office banning the use of the product. This isn't motivated by competition, but instead solely security concerns. For shareholders, this should be monitored going forward.
Zoom's growth has been undeniably fantastic. The product usually works well, and they operate a business model benefiting from the global shutdown. Sure, these trends could have some staying power, but Zoom may not be positioned well to enjoy it. As the valuation continues to price in herculean growth, and competition continues to build out better products, I see choppy waters ahead. Consumers more familiar with Facebook, Google or Cisco may tend to feel more comfortable with ditching Zoom going forward, especially as privacy questions linger and the space matures.