In 2019, Zoom Video Communications (ZM -0.82%) went public. In its prospectus, it listed its total addressable market (TAM) as $43 billion by 2022. Just over one year later, shares are up more than four times in value, and the company's market capitalization is over $46 billion.
The quick rise defies all valuation logic, making Zoom a polarizing stock. And it's not unlike another name evoking strong reactions from investors: Tesla (TSLA -1.92%). These two businesses' operations couldn't be more different, but I think their stories are similar, and that's why I say Zoom stock is the Tesla of video communications. Here are three specific reasons why.
Image source: Zoom Video Communications.
1. External factors pushing adoption
In December 2019, Zoom reportedly had 10 million daily meeting participants. On March 11, the World Health Organization declared the novel coronavirus a global pandemic. This led to a big jump in travel restrictions and shelter-in-place orders. Toward the end of April, Zoom revealed it had over 300 million daily meeting participants -- a 30-fold increase in use in a matter of months.
No one on Wall Street anticipated something like the coronavirus, which would drive physical distancing and a work-from-home revolution in 2020. But here we are. And Zoom's recent adoption could have long-term benefits. Consider that in its prospectus, it said third-party TAM estimates didn't capture the potential growth opportunity once customers have tried a video-communications platform that works as good as Zoom. With prominent companies such as Twitter and Shopify making remote-work options permanent, Zoom's prospectus assertion appears to be validated.
It's possible the coronavirus will grow Zoom's TAM, even in a post-pandemic world. To me, this isn't unlike Tesla. Remember, Tesla doesn't refer to itself as an electric car company in its mission statement. "Tesla's mission is to accelerate the world's transition to sustainable energy." According to Nielsen data, 90% of millennials are willing to pay extra for environmentally friendly and sustainable products.
With recent environmental disasters such as bleaching events along the Great Barrier Reef and floods in the American Midwest, climate sustainability is high on consumers' radars. That wasn't necessarily as true when Tesla was founded in 2003. As consumers have changed their thinking about sustainability over the years, Tesla has become a household name brand. Now, exogenous circumstances are motivating employers to rethink the modern office -- likely to the benefit of Zoom.
Image source: Tesla.
2. Hey! Where's the moat?
Zoom didn't invent video communications, and it isn't the only available option. Just this year, Facebook announced new Zoom-like features, Alphabet's Google made its existing video tool free, and Verizon acquired Zoom competitor BlueJeans Network. These applications will steal market share from Zoom, or so the argument goes. And things will just get worse. Anybody can launch a "Zoom-killer" app, right?
Here's a USA Today headline from 2015 featuring GM: "Tesla killer: GM to unveil long-range electric car." The vehicle in question was the Chevrolet Bolt, finally released in 2017. Since January 2017, Tesla's trailing-12-month revenue is up over 270%. To paraphrase Mark Twain, the reports of Tesla's death have been "greatly exaggerated."
Since Tesla went public, there've been no shortage of pundits saying the established automakers were about to steal Tesla's business. It's the same today with Zoom. But one should ask why Zoom is so popular when there are other legitimate options. Could it be that its unique commitment to happiness drives a superior product experience?
Tesla dominates the electric car space despite competition. Time will tell for Zoom.
3. What about safety?
In 2013 in Seattle, a battery in a Tesla caught fire and destroyed the vehicle. Then in 2016, a Tesla vehicle using autopilot crashed, killing the driver. These incidents led people to believe Tesla vehicles might be unsafe, and the stock sold off both times as a result.
Zoom is likewise plagued by safety concerns of a different sort. Weak security allowed third parties to hack into meetings. With a ballooning user base, Zoom scrambled to implement a 90-day security plan to address the problems. The company rolled out software updates with new features to address security, and it even acquired Keybase, a company that will help with data encryption.
Over time, concerns over Tesla's safety have mitigated. I'm betting the same will happen with Zoom as it fixes its flaws.
Bonus: Shareholders beating the market
Tesla and Zoom are polarizing investments that share some similarities, but there's one final parallel I want to draw: Both companies are handily crushing the broader market. Tesla is up over 3,000% from its IPO. Zoom is up 300% from where its IPO priced.
That doesn't mean Zoom will go on to provide the same returns as Tesla over time -- indeed, this technology stock looks overvalued to me, as I previously suggested. Then again, I've chuckled about Tesla's valuation in times past, but its long-term shareholders are having the last laugh.
