Zoom Video Communications (NASDAQ:ZM) just reported another incredible quarter of growth. Revenue was up 367% year-over-year to $777 million, driven by over 60,000 new business customer additions during the three months ended Oct. 31.
Many investors are betting on a big travel rebound next year, but Zoom is the primary reason I'm not biting. Instead, I'm widening my lens when picking my economic rebound stocks as the pandemic continues to reshape the world we live in.
More businesses embracing video conferencing
It's clear that there are still plenty of businesses that have yet to adopt video conferencing and other remote work tools as a result of COVID-19, and Zoom's results speak to that. The company said it finished the third quarter with 433,700 business customers with more than 10 employees. Just three months prior, the total was 370,200. That's 63,500 new sign-ups. Even if you conservatively assume each new business has only 10 employees (the actual average is much higher than that, thought it isn't disclosed by Zoom), that means the company added 635,000 new business users in just a three-month stretch in the late summer and early autumn months. The total net new user count more likely numbers in the millions.
The figures are even more dramatic on a year-over-year basis. Zoom said it had just 74,100 customers with 10 or more employees at the end of Oct. 2019. The trend isn't limited to small businesses, either. The number of customers paying Zoom at least $100,000 a year grew to 1,289 at the end of the fiscal third quarter, compared to only 546 in the comparable period in 2019 and just 988 one quarter ago. As the pandemic rages on, more organizations are conceding and joining the video conference boom. And given Zoom's outlook for another 329% year-over-year increase in revenue in the current quarter, this run certainly doesn't look finished yet.
Business travel may not come back so soon
But this story isn't about Zoom as much as it is about how Zoom is helping the economy adapt to new realities. With so many businesses still signing on to a video conferencing service and a quick end to the pandemic looking less likely, I'm not so sure business travel will come roaring back anytime soon.
Besides, as I've explained in recent months, many businesses are discovering significant cost and time savings by utilizing Zoom and similar services instead of hopping in a car, plane, or train for an in-person meeting. Zoom's stated goal is to make video conferencing "better than in-person meetings." Many would be quick to say Zoom is a long way from accomplishing that, but nevertheless, I think video conferencing will have some stickiness even after COVID-19 is (eventually) beaten.
Such is the nature of disruptive events like what we've all been subjected to in the last year. We adapt, and usually, those changes alter our future behavior too. All of this is to say I'm not super optimistic about a massive business travel rebound next year. Airlines in particular concern me as business travelers accounted for a large portion of their profitability prior to 2020. Instead of getting laser-focused on which sectors of the economy I think will rebound first, I'm widening my lens and focusing on those companies that can benefit from a more widespread recovery of economic activity. Specifically, I'm looking at payment processing and digital wallet stocks.
Many of these companies like Visa and Mastercard have been deeply impacted by travel and cross-border transactions drying up this year. Newer names like PayPal and Square have also been hit, but they remain in growth mode as spending has shifted to other categories centered on e-commerce. To be sure, a rally in travel (of the business or leisure variety) would be a boon for these companies. But they don't require travel to improve their financial results going forward. As businesses and consumers adapt to the digital nature of the world we now live in, overall spending will rise again and help the likes of Visa and Mastercard mount a rebound -- and support the high-growth trajectory of PayPal and Square.
Put simply, Zoom's recent earnings show that tens of thousands of businesses are still adapting to a new digital era and adopting remote work tools, putting a damper on a rebound for parts of the global travel industry. Investors would be wise to take heed and adapt their portfolios as well. But rather than bet on travel stocks that continue to struggle during the pandemic, digital payments look like a more broad-based investment on economic "normalization" going forward.