How Zoom Went From Being a Fad to a Revolution

In this episode of Market Foolery, Chris Hill chats with Motley Fool analyst Bill Barker about some of the latest earnings reports and other news from the markets. Analysts and investors cheer Zoom's revenue guidance. The guys bring some news from the luxury goods segment, a surprising IPO, and much more.

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This video was recorded on June 3, 2020.

Chris Hill: It's Wednesday, June 3. Welcome to Market Foolery. I'm Chris Hill. With me today, back from the wilderness, it's Bill Barker. Good to see you.

Bill Barker: Good to be back.

Hill: Glad you survived your camping trip.

Barker: Ugh! We don't need to review that one. The people who are listening to our riffing, before we started the show, are exhausted about hearing your hatred of the word "glamping," which we'll cover in a future Apropos of Nothing episode.

Hill: Yes, we do need to figure out a future Apropos of Nothing episode.

Barker: When does the future arrive?

Hill: You know what, we'll talk about that after the show today, but today, we've got luxury goods in the news. We've got some earnings. We've got an IPO, which is surprising.

But one programming note I need to hit, which is that, it's a short week for us here at Market Foolery. There's no show on Thursday, because Thursday is FoolFest, which is our member event. It had been planned for mid-May at National Harbor in the Washington, DC, area. And we're doing FoolFest at home, so it's an all-day video event for our members. So that's going to be on Thursday, so this is the last Market Foolery for this week. We will be back on Monday.

With that, let me get to: shares of Zoom Video Communications (ZM 0.05%) up 4% today, hitting a new all-time high. Their first-quarter revenue was huge, so huge that they doubled their revenue guidance for the full fiscal year. And I know we always talk about whether you need to look below the headlines, and you do, but when your headline is "We're doubling our revenue guidance [laughs] for the full fiscal year," that's a really good headline.

Barker: Yeah, 4% up today understates dramatically what's been going on here, because this isn't really that much more incremental news on top of what you've already seen this year and over the last year. The stock, going into today, was already up a little bit more than 200%. So 4% today is a nice addition on top of that, but everybody already knew that Zoom was in the middle of one of the great software quarters ever, I think, was one analyst's categorization of it. And, of course, we're using it right now, and so many millions of people are using it around the country and around the world. And the reasons for the continued, not only guidance raised, but looking beyond this year why people would be enthusiastic about the stock is, I think they are able to see just how impressive the future may be for this.

Hill: It's interesting when you think about the challenges Zoom Video had a couple of months ago around security. And rightly so. You started to see competitors, like Microsoft Teams and Cisco Systems WebEx work security into their marketing messages. It's a smart move, I would do it if I were them as well. But Zoom Video's response was really impressive, because they [laughs] basically said, "The money we were going to allocate toward R&D spending on new features, we're not doing that, and for the next three months, we're putting all of that money toward more robust security." And it was a really smart move by Eric Yuan and his team. And again, this is their first quarter, [laughs] they just reported, and they feel good enough about the next nine months that they're like, yeah, we're going to double that guidance we had before.

Barker: Yeah, this is the quarter that ended April 30, so it was February, March, April. And things picked up dramatically during March. By the end of the month, most of what was going to be shut down around the country was shut down. So April was even better. And, you know, May, as the length of time that this episode of the coronavirus gets extended and people's awareness that things will change, both, up through the time that a vaccine is available and beyond that potentially as well. You know, Zoom may have been thought early on as something falling more into the category of a fad, but at this point, you'd have to say that not only has it gone beyond a fad to a trend, but it's more in the category of a trend to a revolution.

That is, you know, this show right now, we're doing it on Zoom because we have to. You had never done a podcast using Zoom before this moment, but it was there, it was available. You could have used it to do the podcast with the many Motley Fool employees around the country, they weren't available to come in the studio on a specific day, somebody like Jim Gillies, you'd wait for him to be in our office. Now you don't need to wait for that. Going forward in the future, I'm sure you'll want to, when the office is available, I think the chemistry is better between host and guest when they're there in the studio. But you can get Jim Gillies or Rick Munarriz or Bryan Hinmon or people around the world, of course, in our company to Zoom in and produce your shows that way.

And so, I think that you're using it right now, we're both using it right now for this, but it's going to be used even when it doesn't have to be, for a lot of things that it could have been used for, and people just hadn't, their imaginations hadn't gone there yet.

Hill: Right. And think about this as a product, as a business product. This is something that many businesses had available. And, you know, whether they're using WebEx or Zoom Video or Google [Alphabet] Hangout, whatever they're using, businesses are using this, this is not a consumer-facing thing. Well, now it is, it is absolutely a consumer-facing thing. And there are people across America whose businesses use one of those other video systems, but they've probably now got exposure to Zoom Video in their house, because maybe their kids are using it for school.

So a big part of the challenge for any of these videoconferencing businesses is getting people just to try it in the first place. And now we're in this situation where everyone is kicking the tires on this. So one of the narratives about Zoom Video for a while has been, as you said, well, this is a fad, we're going to get past this. And then, even, it's like, well, how many people are they going to convert into customers? But now it just seems like so many people are exposed to not just videoconferencing but Zoom Video in particular, that the idea of, well, when we get back to normal, you know, corporations are still going to make their decision... I don't know, I feel like Zoom has addressed the security issue in a strong enough way and gotten exposure to all these people that people who otherwise would not have had an opinion.

And I would include you and me in that. You know, previously it's like, what video conferencing system does our company use? I don't know; people much smarter than you and me are making that decision. But now, people have opinions. They're going to have opinions, because they've tried Zoom, even if their business, their place of employment is using something else. So I don't know. I mean, it's eye popping that they doubled their guidance on revenue for the year, but I also get it.

Barker: Yeah, they're up 354% year over year on customers with more than 10 employees. That's one metric, they pull out, they bullet point, they highlight, they put it in bold at the beginning of their report, because it's such a big number. And it's one way to measure the growth. And I don't know, have you had Zoom calls during this time with your college friends or your family or that you hadn't done before? I'm going to assume; I hadn't. But, you know, it's now one, two, three of these a week in my life with old groups of friends or family, which will probably continue past the time when that's the only way to connect with people. And it's gotten every age group too, right? I mean, the kids are forced to use it by their schools, and so they have it. And parents and grandparents are using it to connect with their kids.

So it's not just like any number of the social media companies which have had wildfire growth, but more in a younger demographic which has less money. And certainly, the numbers are outstanding for some of those platforms, but you're capturing everybody. And if you have to spend $5/month out of your own pocket to maintain Zoom access at the point at which they charge the consumer-facing side of the product, people are going to have already developed, I think, addictions to it enough that they can monetize what they're now providing for free.

Hill: Let's move on to luxury goods, and Tiffany (TIF) is in the spotlight today on a report that the planned $16 billion takeover by LVMH may not go through. Now, LVMH is Louis Vuitton Moet Hennessy, a luxury goods company based in France. Market cap around $45 billion. Reportedly, they had a board meeting on Tuesday, [laughs] and looked at what's happening in the United States, and they may be having second thoughts. Shares of Tiffany are down nearly 10% this week.

Barker: Yes, it's certainly no surprise that any merger and acquisitions where price was agreed to back in the fall and hasn't closed and has the opportunity to renegotiate or escape from. Now, there may be penalties involved on that based on whatever the agreement at the time back in the fall was, but just as the Victoria's Secret spinoff seems to have stalled and just really anything where a price was agreed to, I think gets revisited in this time.

Now, the drop is not all that great, because economic conditions don't look nightmarish from some perspectives right now, but there are certainly a lot of question marks about how Tiffany, what level of strength there is going to be in the consumer over the very near term.

Hill: Do you think Tiffany needs this deal?

Barker: No, I don't think they need this deal. Well, there are some questions I think about the debt levels and the debt servicing, but I'm one of those people that looks at Tiffany's business and what it sells with the knowledge that ultimately, all jewelry is a scam. That something like a diamond is not a rare thing, and the reasons why diamonds are expensive have nothing to do with the scarcity of the product but the brilliance of the marketing behind it.

And at some level, you can look at anything, like rare gems and gold, and say, I don't know, what if everybody agreed not to pay anything for that stuff? Then where does Tiffany's go? But, you know, hundreds and thousands of years of people choosing otherwise is a lot of counterweight on the other side. So I think that there's always the danger that something like diamonds, in particular, that the market collapses for those, but it hasn't yet. So not having done so, Tiffany's is the brand name that everybody looks to in that space.

They are producing a product, for the most part, that caters to the most well-off. The most well-off are hurting the least in this time, so I think that their business is not under great pressure. But it makes sense for them to join with a worldwide company like LVMH, which has these phenomenal luxury brand names and knows that space and knows how to combine them and market them and can allocate capital to the different brands according to what makes the most sense rather than just trying to grow your one brand, as Tiffany has to do, regardless whether it makes sense to try to grow that in every geography.

Hill: Just a little relationship nugget from Bill Barker there. For anyone listening who is dating someone and thinking, maybe this is the person I want to marry, just drop that into a conversation -- "Well, you know, ultimately, all jewelry is a scam" -- and just see how that goes.

Barker: [laughs] I mean, I can fall back on personal experience. I went through the buying the engagement ring, emptying my bank account to do so. I think, literally, that's what I did. I was like, whatever is in my bank account, that's what I'm going to spend, you know, there's that like three-months-of-pay rule or salary rule, that also is just another brilliant scam by the industry. "Hey, why don't you just take three entire months of your salary -- "

Hill: ... I think it's two months.

Barker: I guess, it depends, it's like tips, you know, it moves over time. Like, oh, you're supposed to tip 18% now, it used to be 15%, that maybe 20%, maybe 25% is good. Not that that's a scam. But unfortunately, then 15 years into our marriage, the diamond fell out of Diana's ring, and she was upset by that. And I said, I don't know, I mean, the ring did its job, it's, you know, [laughs] don't shed any tears over this, we don't have to worry about that being gone.

Now, that actually conveys, of course, that the amount of money in my bank account at the time I bought the ring couldn't have been that much if I was able to, like, ah! Whatever, [laughs] don't worry about it. But I think all the couples out there that decide to take that money and invest it into a phenomenal honeymoon rather than spend it on a ring are making a choice that this generation, you know, some of them find logical and appealing. And to the extent that that notion takes off even more so, the diamond industry is that much more under pressure.

And I would have to say that I have enjoyed many vacations and my honeymoon more than I think, you know, the ring was worth it.

Hill: Let's wrap up with an IPO. Warner Music Group going public today at $25 a share. We actually don't have a price as of this moment, usually 90 minutes into the trading day, we have a price. I haven't seen one yet, but is this the right move to IPO in this environment, in this business? One of the things we talk about is, when a company is getting ready to go public and they want to make their S-1 filing look as good as possible. Total revenue for Warner Music Group was down in the first quarter. I mean, I'm not saying the music business is going away, but this is not one of those IPOs that I'm on the edge of my seat, excited to buy into.

Barker: Well, you've listened to music, right?

Hill: Sure.

Barker: So what's your experience with that, pretty good stuff?

Hill: Yeah, music as just a thing to listen to? Yes, I'm pro-music.

Barker: Yeah. So I think [laughs] that's sort of the basis here. The music industry, when you say, "Is now a good time?" or "Is this the right time?" Market conditions are reasonably attractive to sell stock if you're a business. This is not at all a bad market in which to raise capital, not that the company is raising capital. This is selling shareholders. Tthis is the private equity that took the business private in 2011, spinning it back out to the public.

You know, right now, the economics of the industry are, you've got a lot of cross-holdings, and I believe Tencent is an investor in this company, in this IPO, or there's news that they took what will amount to maybe a 2% stake of the company. You've had Warner previously having owned a stake in Spotify, and having, I think, sold that off. So between the record labels and the owners of the music and the platforms that now have taken over how people listen to music, the marriage of those things is constantly evolving but is not as dangerous, I think, right now for Warner Music Group as maybe a couple of years ago when things were less settled and the cross-ownership was not quite as established.

So I don't know whether it's worth investing in the company. I'd have to look at the numbers a lot closer than I've looked at, which is not at all so far, because it's not public. And I'd rather, you know, something be out in the public for a little while and see what their game plan is rather than get excited about the possibility of investing in this company today.

Hill: Yeah. And a nice reminder that as a general rule of thumb, it's always worth remembering that being a public company is more challenging than being a private company. And as investors, we tend to want to see a couple of quarters, we want to see how you do a couple of quarters. And part of that is how you do on the conference call.

Barker: Yep. So you know, Warner Bros. is a phenomenal name in the industry throughout our lifetimes. And you know, they've got a lot of great music in their library, and the ways to monetize that are abundant. And this is actually, people are listening to more music, from what I understand right now. You're more of an expert on this whole music thing than I am. But I think, you know, it was not historically a phenomenal investment, the Warner Bros., but it's been combined and divided up so many times over the years with the different pieces of the business, I think just having the music business separated out is going to make it easier for investors to make intelligent bets.

Hill: Bill Barker, good talking to you as always.

Barker: Good to be here.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We will see you on Monday.