An Investor's Look at Vimeo

For many investors, Vimeo (VMEO -0.56%) is associated with a half-baked attempt to usurp Alphabet's ubiquitous YouTube. However, now that Vimeo has hit public markets, it has a bigger plan: becoming a software service for the masses. In this episode of Industry Focus: Consumer Goods, Motley Fool analyst Asit Sharma, with host Emily Flippen, breaks down this old name and its new business. 

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This video was recorded on June 8, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Tuesday, June 8th, and I'm the host of this episode, Emily Flippen. Today I am joined by Motley Fool Senior Analyst, Asit Sharma, as we take a look at YouTube's weird failing younger cousin, at least that's how I imagine this business. That's Vimeo. Asit, thanks for joining.

Asit Sharma: Emily, thank you for having me, very excited to talk about the video company in general. I'll tell that story in just a bit.

Flippen: I feel like I shouldn't say anything because I've been getting away with it for so long. But I have to say this at the offset. This is a stretch. This is a consumer goods stretch, I'm aware. But this is also a really interesting business that has some consumer-facing aspects to it, that I think it's important to chat about. Nobody else was planning on chatting about it. Asit, I know you've done a lot of research on this business, so I felt like we just had to chat about it today. I apologize to everybody who is tuning in and expecting a retail rundown. I promise at some point in the near future, I'll get back to defining consumer goods with a more strict lens.

Sharma: Yeah. I think that this is a company that several years ago had a very consumer-facing front. We can talk about its history a bit as a competitor to YouTube. But it still has, as part of its business model, this consumer intake where anyone who wants to make a video can do so. You can use their tools for free. It reminds me a little bit of a company called Wix, which does amazing things for those who have no technical expertise and want to build a website. Part of Wix's business model is to grab out of that stream of free users, those who might be connected to a company or might be running a business and eventually make money off of them. At least that part is still very profitable for a consumer goods show, Emily. But one of these days we're going to stretch the rubber band and it's going to snap, and we'll have to get back to basics. But as long as we can get away with it, look, one more show is not going to hurt anything. Let's roll with it.

Flippen: How does the phrase go? Ask for forgiveness, not permission?

Sharma: Yeah. I sometimes think that's not a bad way to live. Of course, it has its risks.

Flippen: It certainly does. Well, I actually love the connection to Wix, because it's funny, doing my initial research on Vimeo, again, having my opinion somewhat colored by my previous experiences with the site, I came away feeling pessimistic to lead with my strongest statement here. Not a huge fan of this business, but you know what else was a business I was not a huge fan of? Wix. For a lot of the same reasons, I was like who really needs this service? WordPress exists, is Wix really all that special? The quick answer was, yes, it was. Not only was it special and sticky but it served a growing need, and I can see myself in my opinion Vimeo being very wrong for a lot of the very same reasons.

Sharma: Well, Wix is a company that almost seemed frivolous at the outset, and they proved out their model over time. This is a company that seems the opposite of frivolous because in some ways they've set a lot of video standards that we take for granted along the way and they've been associated with curated content, for those of you who still like to go see your artsy, high-quality videos straight on their homepage. They exist in that realm as well. But I should say leading with my strongest statement as well, that I came into this thing, I was going to be a lot more excited about it. I reached out to you like, Emily, let's do this one. I looked at it, glanced at it, and it looked pretty good. I feel like just skimming through, but this is the problem with just skimming through a set of numbers. Once you start digging, sometimes you're not as excited. After leading with my strongest statement, let me not give away the rest of my thinking. We'll plunge in and maybe some very astute listeners on the podcast will be able to write in and give us some reasons why we should be more enthusiastic after we finish the show.

Flippen: Well, let's rewind to 15 years for Vimeo. I was, I think, 11 or 12 years old. I was right in that prime age group of people who would be using Vimeo, not to use Vimeo as we know it today, but to watch videos from CollegeHumor. I'm not sure if you remember CollegeHumor, but it was a very popular site 10, 15 years ago and Vimeo was started just as a way to distribute and publish these comedy videos from CollegeHumor. I think IAC came in pretty soon after that and thought to themselves, man, we have what could be a competitor to YouTube on our hands. They snapped it up and put down this big grand vision, which as we now know being 15 years later in the future, didn't quite come to fruition.

Sharma: Yeah. I actually was never a viewer of CollegeHumor, but came into Vimeo just a few years later. This is after the Great Recession. I'd hung up my shingle as a consultant and one of my first clients was a video production company. They were very much into the platform. They used to tweet out videos straight from Vimeo, and they were always really excited about the high quality of the platform. They very early on saw something else in it, which didn't end up being the end business for Vimeo either. But I think it speaks to the fact that the platform had a lot of potential, but not a huge amount of capital to become a worthy competitor to YouTube. They had to pivot at some point.

Flippen: They did pivot. They pivoted a lot. Tried a lot of different things, lots of different ideas. I think at one point Vimeo thought they were going to be a content site like Netflix or Hulu. After failing two both you saw YouTube and Netflix. In 2018, they pivoted to this new model where they're trying to turn their platform from free form videos and to essentially what is Software-as-a-Service, offering subscription-based tools for creating and storing videos as well as collaboration and distribution across different channels. Instead of going to Vimeo as a consumer to watch videos on the site, enterprises, small businesses, medium-sized businesses are using Vimeo as a platform with which to create content, which they then push out to sites like YouTube. I think they settled on what is probably a better business model when you look over the past few decades.

Sharma: I think so. Sometimes, in trying to innovate over a span of more than a decade, you come up with a lot of tools that are sitting in plain sight that you can repackage and monetize in a much more efficient manner. This is what's happened with Vimeo. They basically are this one-stop-shop. If you are in the corporate world, if you have a small business, medium-sized business, or you're an enterprise company and you want to have a truly professional video, then you have to go to video services company and a single production, whether it's a commercial spot or even just something that you want to pull up on your homepage that describes your company accurately can run easily into the tens of thousands of dollars. But Vimeo gives companies the tools to create high-quality video on their own. Then go through the rest of the process down to the SEO, the marketing, the analytics. Putting all of these tools together in a suite, selling it in this capital-light model has been a value creator for IAC and that's why they wanted to go ahead and let their shareholders realize a bit of this. Also, I think too, we should always point out when we talk about corporate spin-offs, that typically these are tax-free distributions to shareholders, which I believe it was in this case. 

The second thing is that a core business sometimes performs better after it spins off the orphan business if we can be allowed to call it that. The orphan business has a dedicated management team that can make its own decisions about resources. They no longer have to beg for resources from the parent company. The parent company can focus on what it does best. It can be the best of both worlds and we've seen this happen time and time again. Doesn't always work out this way. eBay spun out PayPal. PayPal has done phenomenally well as an investment. eBay hasn't been too shabby either since the spin-off. I don't know as much about IAC. Frankly, it's a holding business that I'm not quite as interested in, but I certainly see some potential for Vimeo as we talk a little bit more about its model. How the stock could, at least what we say in our terminology, Emily, make money. That is, give positive returns to investors who's willing to hold for a period of several years.

Flippen: IAC, I've tended to be a skeptic because when they spin out businesses, obviously, they do so in a way that is really accretive to IAC as a business, not necessarily the one they're spinning off. If we rewind back to about a year ago, I believe it was their spin-off of Match Group, which was a wildly successful investment for them. But prior to the spin-off, they had loaded Match Group up with a bunch of debts in order to pay a special dividend prior to the spin-off to pay off IAC. It was something that I would imagine as Match Group shareholders, if you're looking at the spin-off, you're thinking to yourself, great, now, I'm left holding the back here on a business that is heavily indebted, really just paid off what is their already rich sponsors. What's left for me? The quick answer was a lot. I'm not sure if you've looked at Match Group's share price over the last year, but it's been an outstanding business and an even better investment. I try to take that with a little bit of a grain of salt when I look at Vimeo. Just because we're seeing the spin-off from IAC doesn't mean that Vimeo can't succeed on its own. I'd like to give the management team who is relatively young and has never run a public company before the opportunity to prove themselves with this business. If they're half as successful as Match Group is, then I think there could be a lot here. 

I think my concern just comes down to the industry and the business. Very similar to Match Group, this is a business that operates under a freemium model. You can come on, sign up to be a Vimeo customer, and then the idea is Vimeo's then going to upsell you into higher paid tiers. Somebody comes on the tender and then upgrades in order to super like somebody, you come onto Vimeo in order to make a short-form video and upgrade for things like unlimited uploads and other storage solutions.

Sharma: Yeah. This is something that has worked very well. But on the other hand, the whole video industry is extremely competitive. Let's talk about how this company has used its subscriber base. We should refer to both its free subscribers and those who actually pay for their subscription. Maybe just the terminology, we'll call them free users and then subscribers to make the difference easy. Emily, you pointed out a set of metrics that I had an interesting observation on. I'm going to just talk about the metrics and then love to hear your observations. You were breaking down paying subscribers and the growth in this metric. We look at 2019 at 1.23 million paying subscribers. That's grown at an annual rate of about 23% over the past couple of years. Even when you compare it to the pre-COVID year, the numbers today look pretty strong. They've got almost 1.6 million paying subscribers today. You were also, when we were prepping for the show, talking about average revenue per subscriber. Looking back at 2019, they were generating $180 off of every subscriber. That number's grown to $233 as of the first quarter of 2021 on an annualized basis, which is also a growth rate of 23%.

Flippen: That's impressive, but it's important not to take away that this business is growing at 23%. Because it actually has a compounding effect between the paying subscribers and the average revenue per subscriber. That 23% that they're growing in paying subscribers is compounded by the fact that each existing subscriber is also an average spending more, around 23% more year-over-year than they were in 2019. There's a compounding effect that I like seeing whenever I see growth in paying subscribers and average revenue per subscriber. That will be a critical metric to watch, I think for investors moving forward. Not just because you want to see them deepening their relationships with enterprise customers and we'll get into their things like dollar-based net retention rate a little bit later. But it's also really critical because at 1.6 million paying subscribers, that is small, like a very, very small fraction of their total free users and a very small fraction of the total market opportunity. It might sound fake to somebody 1.6 million. But in reference to the size of this business right now on public markets and size of its market, it is puny. It's a very, very small amount of audience that they are monetizing right now. I think it will be pretty critical to watch that group. Then let's put it this way, that 23% cannot slow down anytime soon. It needs to be accelerating because that's how big the market opportunity that management has addressed claims it is.

Sharma: Right and this is management's arguments in going public that we've got such a great amount of space we can grow into. To do that though, means that they have to capture the market share. What Emily is pointing out here is if they don't capture that growth, someone else is going to take the market share. One thing that I liked in their subscriber base was just how much the freemium model enhances these metrics and proves out a little bit of management's proposition that they have more market share to take. This management team tracks success in part by how many free users it has and how many it brings on each year. That's because the company has shown itself to be very adept in converting free members to paying subscribers. Looking at those 1.5 almost 1.6 million subscribers, about 60% of those started as free users. The same cohort, if you trace bookings for 2020, they provided 50% of total bookings last year. Half of the company's total bookings for 2020 derived from members who originally were free users and decided, as you were describing earlier, to jump onto maybe a lower tier and in some cases move on up into the higher tiers. This is something that we'll discuss. They do have a foothold in the enterprise market, which is another place if you were to examine it versus the market share, it's tiny. But there is some sense that management will be able to migrate more single users within a corporate department to other departments within enterprises. 

We've seen that model play out pretty well for many SaaS companies, Software-as-a-Service companies we follow. I also wanted to add here that they've now got 200 million total free users and last year they added 35 million alone, just in the last year. If you're Vimeo's management team, this is great. Now, to me, I tend to sometimes worry too much about metrics and numbers. To me, this is almost like a warning signal. I've got so many free subscribers on my platform and just a very small percentage that are converting. However, you need a big funnel if you want to grow your market share and they don't have any problem with the funnel. Now, it's all about conversion.

Flippen: Conversion is actually where we are most concerned for this business. We mentioned there's tiered paid offerings that range from seven dollars a month to $75 a month, and management actually notes that, "Hey, 90% of our paid users were paid users that never spoke to a sales staff and never spoke to customer support." They claim that like it's this great thing. People see the value in the offering, so they make the choice themselves to upgrade and it's not confusing, it's clear, maybe that is the case. But the only thing I read from that was if I'm spending seven dollars a month on something, I'm probably not going to go and reach out the customer support. But if I'm actually upgrading in an enterprise solution, if I'm paying $75 a month, maybe I want more information. I read that to say that even those people who do manage to pull out of this really wide funnel are really still only paying for the lowest level in paid tier subscriptions.

Sharma: It could be, and of the things that were lacking in the S-1 were better definitions of what an enterprise customer is. Now, the company provides a definition. It says that an enterprise customer is one that has purchased plans through contact with the Vimeo sales force. But most companies will define an enterprise customer in terms of how big it is. It gives us, say, $100,000 worth of revenue in the year. With that, we don't get a lot of information about this direct sales force that Vimeo has to target companies that could become bigger players within its subscription-based. I found that that was lacking a bit in the S-1. More clarity around that might eliminate some of what you're pointing out Emily, because we don't really understand how good Vimeo is at conversion. We don't understand a lot about the strategy that it uses to convert customers into bigger clients who are paying more and climbing up those tiers. But we'll put that aside for a bit now, probably should talk about this market opportunity in general.

Flippen: Yes, the market opportunity is actually, I think I found myself struggling. When I look at business as I like to ask myself the question is, what's the bigger picture if I fast forward five, 10 years from now, what problem is this business solving? Vimeo curves out this really large market opportunity that factors around more and more businesses, small, medium, and enterprise businesses, all coming to them to help manage growing video solutions. Things like live chat, things like branded but not monetize content aimed at consumers or just brand awareness in general. That's all fine and dandy, but I still can't figure out what problem Vimeo is fixing because you can get a lot of those solutions already on the market today. I think the market opportunity is really aimed at those small to medium-sized businesses and even just entrepreneurs. People who have their own business, maybe you have a very small team of people working with them. Aimed at converting those people because Vimeo can be a one-stop shop where they can manage all of their branded content in a single place. I can see a little bit of value there, but it is admittedly smaller than the entire market opportunity that Vimeo has curved out, which is 300 million subscribers within these small-to-medium-sized businesses, and one million within enterprise customers. Right now, their enterprise opportunity, as you mentioned, is very small, they have 3,800 enterprise customers representing around 23% of their total sales. They are not penetrated greatly within that one million enterprise customer market opportunity. I tend to think when you're relying on defining a giant market opportunity in order to explain the purpose of your business, you're missing the forest through the trees.

Sharma: There's only one company that I can think of that does both things you laid out at once, Emily. So, solve a problem in the marketplace and successfully hits every segment from the small business to the medium-sized business, to the enterprise customer. There's only one company that I can think of that hits both conditions at the same time in the whole consumer goods space as it relates to Software-as-a-Service, consumer-facing applications and that is Shopify. But Shopify is solving a big problem. How do you become an omni-channel retailer? If you're a mom-and-pop operation, or even if you're Kraft Heinz, that needs to suddenly compete on the web and throughout the zany products for the younger generation to exercise that brand power. Vimeo doesn't really have that problem that it's wrapped it's fingers around to solve because there are so many different segments of the video market that concern different problems. 

For one, there is live streaming, there are small corporate videos, there are video messaging, there's interactive video, but there isn't a single problem and this whole range targeting the very small customer to the enterprise customer could be a sign of not having a firm enough strategic emphasis on one part of the market and I will tell you what I think, where I think they should go is the enterprise opportunity, which I find extremely interesting. You mentioned those 3,800 enterprise customers, those grew 87% year-over-year in the fourth quarter and they have an average annual spend of 20,500. Now, that's small potatoes, 3,800 customers and their average spend is about $20,500. Even so, management notes that about 60% of the Fortune 500 has at least one paid account with Vimeo and they've got great net retention with these clients. If you look at dollar-based retention, I think the term for it is net revenue retention. But for those of you who are familiar with net dollar retention, it's basically the same thing. We can just say on average, that customers are spending about 110% more quarter-over-quarter. This is as of the fourth quarter. I didn't see the figures for the first quarter. I think they are roughly similar to the prior year. So on average, and their definition does include churn, on average, customers are spending 110% of what they did in the same period in the prior year. 

I think this is where Vimeo should focus. I do get the wide funnel and the need to pull on people like myself. I could go in and open a free account after this podcast and maybe put up a video of my thoughts on Vimeo. But they're not going to monetize me very successfully. I think go where the capital is, the value creation, and that is in the Fortune 500. This equation could be glass half-empty, glass half-full because there is a lot of market share they can still take because of being so tiny. I did see in their S-1 filing that out of their total subscriber base, only 1% of that total subscriber base is paying more than $10,000 a year. Again, this goes toward the glass being half-empty, that the company has a long way to grow and it's got plenty of opportunity ahead of it. But as we're going to keep discussing, it's not that these are wide open paths to capturing market share and revenue.

Flippen: I could entirely be wrong here, but when I see that they have such a small number of enterprise customers and even smaller number of enterprise customers that are spending more than $10,000 a year with them. But then 60% of the Fortune 500 have at least one paid account. That number makes me scratch my head a bit and wonder, do they not have any pricing power? Well, while that 110% retention rate is wonderful and a good example of maybe there's a little bit of pricing power with the people who are sticky with having a very cheap paid account with Vimeo with enterprise customers is not what they want to do. They want to convert those enterprise customers into really, really high-value consumers. I just wonder if there's too much competition in the space that they're having a hard time convincing enterprise customers that they need to pay more than $10,000 a year to use Vimeo, especially when these people may be thinking to themselves, well, there's a lot of free options, or maybe are already paid for an option to some corporate subscription through Microsoft, through Zoom, whatever it is that I can use instead. It does make me a little bit nervous, although I will admit happily that if they are able to execute on whatever semi unclear strategy they have for targeting the enterprise customers. If their product did stick, I can see it being a very successful attempt from them.

Sharma: Yes, they've got a lot of brand power among these enterprise customers because your average purchaser of corporate video is much more familiar than maybe I am with Vimeo's history as being a go-to-destination for curated content, but also standard setting in video. They have been regarded as the leader in video technology for years. A lot of the standards that we take for granted to-date, we're set in motion by Vimeo and a few other companies. I mentioned this in their S-1, how they provided advanced imaging and audio protocols, new video compression formats, intelligent streaming algorithms, etc, how they were at the forefront of this and I think they've got that brand equity with corporations. The trick is persuading corporations that it isn't about pricing power in our service versus another on a commoditized basis. It's about the value that we can provide being experts in this field. 

Now we're going to give management a break here and talk about the strategy that they have discussed, even though it's not in a high amount of detail. But we would be remiss not to say that before the spin-off occurred, just a few weeks ago, Vimeo raised about $150 million of fresh capital late last year from two venture capital outfits. One was Thrive Capital, which has invested in Slack, Stripe, and Instagram, and also GIC Investments based in Singapore and they've invested in Alibaba, Snap, and Spotify. The CEO of Vimeo, Anjali Sud, had a really great blog post where she described this fresh intake of capital and laid out not what the company actually is going to do with the money. I mean, she did give a broad statement that we will be investing in tech and in people and geographic expansion. But thematically, where this capital would be pointed over the next few months. Bear in mind, this is not a truly long-term strategy. But she named, first of all, teams in enterprises. I quote here, building the single video solution for the modern organization. She talked about a team's first experience expanding the messaging tool called Vimeo record and launching a suite of tools that's more geared toward security. 

These are all steps you would take if you're trying to get deeper within those enterprise markets. We have to spot them some slack there. She also mentioned live events. Making video creation even easier. Working with more integrations, the platform plays really well with others. It integrates with YouTube and Facebook among others. These are actually competitors of the platform and she also talked about the highest quality video experience. Sort of going back to the roots of Vimeo and making sure that they've got that marketplace value proposition of being associated with the quality. We should give them some time in that sense to execute on this vision. But it really isn't as succinct and clear a strategy as they could've laid out in this S-1 to say, look, we want to raise this average customer spend to $100,000. We're going to focus on the Fortune 100. Our direct sales team is going to land within these departments where we have that one contract or foothold and expand it and that lack of detailed bothered me a little bit because otherwise, I like the business and Emily, in just a bit here you're going to lead us through a discussion of their financials, which they will create.

Flippen: It's funny. I came into this conversation feeling unconvinced, but as I've listened to you talk, I think I'm slowly getting convinced. I think I've just built a bowl argument in my head, but I'm going to save it for the end because I don't want to derail the financial conversation because it is worth talking about their financials and in this case, it's actually way more impressive than I imagined that if you breakout both their revenue in the gross profit, some impressive growth since 2019, revenue grew 46% over that time period but more importantly, gross profit grew 65%. They're clearly getting some level of operating leverage as they're expanding, which may have to do with getting more penetration from enterprise customers. Looking at their performance in 2019, acknowledging that 2020 was maybe a weird year, I was actually more impressed looking at their financial performance than I was expecting. They're well capitalized, they have no long-term debt, they're free cash flow positive. A lot of the red flags that I've come to associate with IPOs recently, I'm not getting here.

Sharma: That's true. We've seen a lot that look like they're just limping toward the IPO and I want to just take a quick digression here for those of you who are newer to looking at S-1s and prospectuses. Whenever you come to the financials and store the narrative of a company that's going public and you look at this document that we keep referring to the S-1, also known as the prospectus, actually one is supposed to encompass the other, but they're interchangeable [laughs] for all practical purposes. Find that use of proceeds section, it's always in the table contents, or you can control F and search for the term, use of proceeds. When you see that a company is basically raising money to pay off debt, then go straight to the balance sheet, oftentimes you have a red flag there, and then you can, in many cases, couple that with poor cash flow declining margins, and realize that it's a company to avoid. Anyway, just a quick note there that it's always important to understand why a company is going public. In this case, it's pretty clear it's a spin off that we think management of both the parent company and the target company both see us as beneficial for both businesses. 

Those numbers, yeah, Emily, they follow those up with a first quarter report recently that was similarly strong, revenue grew 57% and hit almost $90 million, gross profits was $65 million, and that grew on an absolute basis by 67%. On top of that 57% revenue growth, gross margin itself increased by 4% to 72%. Starting to look more like your typical software-as-a-service company. It had a very small operating loss, they were positive on an adjusted basis, which I don't pay too much attention to myself, but the net earnings for the first quarter came in at $3.3 million. We should note though that it looks like they might be lapping some of their own search from COVID. Almost every company we've talked about this year, we've had to put in the context of COVID-19, they provided some figures on revenue and subscribers broken down by month. Now, bear in mind this most recent report ended in March of this year. They provided some preliminary figures for April, which like the quarterly report, haven't been audited, but this was a little bit weird in that the company noted that they haven't really formally closed out their books yet. These metrics could be a little bit off but taking that for what it's worth, they show a slight decline in the pace of year-over-year expansion. In January, February, March, their revenue was expanding each month, at least 54% clip. 

When you look at subscribers, that growth was in each month growing 25% year-over-year at the least and both those figures dropped off. In April, revenue looks like it grew 46% year-over-year, subscriber growth grew 21% year-over-year, still very nice growth, and their average revenue per user also slumped a bit. It was averaging about 26.5% in the first quarter of the year on a year-over-year basis. In April that fell to 19%. I take that with a bit of grain of salt here, simply because there are a few businesses yes that seem to have really, really sticky advantages coming out of COVID-19 but not every business can do that, and this is not much of a drop off, just a bit of realism creeping in as it laps that period where things are really peaking in the spring of 2020.

Flippen: I still have, I think, concerns with the size of this business in seeing those numbers fall off. There will be some level of normalization that I don't want to undercut. But when you're only doing just over, I think $315 million and trailing 12-month sales, it's important to keep growing at a pretty quick pace, especially because we're talking about a business whose market value right now is over $7 billion and it's important to just keep it in the context of, what's the market pricing in? I would assume they're pricing in growth that is greater or continuance, I should say, of what they've experienced in the past, a slump from 57% in January to 46% in April while potentially a one time thing, 46% is nothing to scoff at, we don't want that falling another 10% over the next four or five months again. I think if that were to happen, that could probably pose a pretty substantial risk to shareholders.

Sharma: Yeah. Emily, what you're basically laying out here are some red lines, it's always important to not make them red because then you could never go back, but some yellow lines would be more accurate. I think this makes a lot of sense to me because it's a market share proposition. The company is small, it's young, it's growing very quickly, but you don't want all of that even with a strong balance sheet if the growth isn't going to be there. As you said, this is not a company that has been public for a long time undiscovered. It comes to the market from a bigger company with a pretty decent market capitalization here. To grow that total enterprise value, which essentially is the market capitalization because they don't have any debt, they're going to need that revenue, you got to pull it in the top line, and then yes, if they can continue to hit some operating leverage, increased that, then you're off to the races. I will say, going back to this idea of scaling, why they, I think have a little advantage here is that there are two biggest costs, we briefly talked about this, the hosting and delivery. Because those are sunk costs, you pay your third-parties, basically, yourself as a subscriber as a Software-as-a-Service company, if you're using Google [Alphabet] and Amazon, which in this case Vimeo is to provide your software stack. Then you've got these costs you have to incur every quarter, the more users you can bring on, the more those costs get spread and more efficient you become on a gross profit basis. So yeah, they have an opportunity to scale here. They can't slow down. 

Flippen: When you think about the key risks, I'm going to hold off on my opinion because I think my opinion has changed over the last 10 minutes. But I'm curious about your thoughts. What do you think are the key risks for this business? It can't be cash generation, what is it?

Sharma: I think maybe for me, it's optionality risks. I've been trained over time to look for what else a company can do with its assets. I wish I could say that I was trained by a lot of great investors, but I was trained by my own dumb mistakes. I buy a company that was killing its own markets but didn't have anything else to offer after that, and the trajectory of holding a stock which is only good at one thing over the years and doesn't have a management team that is good at creating new opportunities. That hurts as a shareholder. I always look for some optionality. I see it here, but I want to point out that while this core business that Vimeo is centered around, which again, is providing a one-stop-shop for creation, collaboration, distribution, hosting, marketing, monetization, analytics. 

While that business is strong and doesn't have a one-to-one robust competitor, everyplace else that they can expand and hit a new revenue stream is going to be difficult. I will give the example of live-streaming and our wonderfully smart producer Tim Sparks noted in our chat as we are recording this episode that the company purchased Livestream a few years ago and got into the live-streaming business, which is absolutely correct. They actually had a field service. They were going to launch this video-on-demand service, but it didn't work out, so they bought Livestream instead, and it's been a good business for them. But to take live streaming to the next step, which is monetizing an events business that uses live-streaming technology, to do that, it's going to be harder. They've already seen the opportunity for some further monetization by integrating, which again, they play very well with other companies. They've integrated with Eventbrite, which itself is a publicly traded company. You use Livestream as your technology component or Vimeo as your technology component, whatever the branding is, Eventbrite as the ticket or ticketization component, if you're trying to run an event. Maybe that was a mistake, maybe they should have invested in their own total platform. Because if they want to extend optionality in this one part of their business, guess who is introducing a complete service around this in August, is the only other company that you could look at as providing us high-quality video compression with minimal packet loss and maybe they do it even better, and that's Zoom. 

In August, they are rolling out an event service with live streaming, with ticketing. Just aimed at the corporate market. I think, wow, this should be Vimeo's market. I really like this business, but the risk is how do you make more money in a crowded video market? Everywhere you turn, there's already somebody there, and they're good at what they do. Those were the risks of how they extend out of here. I do like the financials I see, and I like the management team. I like the way they think. That's the biggest. I've got one or two other smaller ones. But go ahead, Emily, your big reveal on your idea first.

Flippen: I'm not sure if it's much of a big reveal. I had written that my biggest risk I thought was to avoid competition in this space. There is no other one-stop shop, but there are lots of people doing snippets of the work that Vimeo does. I wasn't quite sure if Vimeo had the cache or the chops to really make it a market of its own. For that reason, I'm not entirely sold on the business. But as you were chatting earlier and as you just reiterated, I think there's an opportunity here for Zoom actually. I toyed around with this idea for a while about Zoom, and what they're doing with the $4.5 billion, $5 billion of cash they have sitting on their balance sheets right now. I think one half is insecure, longer than one, I think it's 1-3 years. Then they still have $3 billion of marketable securities due within a year. Most of which are just sitting in cash on their balance sheet, which to me says, "Man, Zoom is just looking for something to buy." I had semi-joked previously that I thought Discord might be a natural purchase for them. But I actually think something like Vimeo, maybe even more obvious. 

I think it comes down to the question of, can they do it themselves or do they need to buy the resources to do it externally? I know that Zoom investors want optionality, and when you were chatting about Vimeo as a platform, it reminded me so much of what investors want for Zoom, which is for Zoom to become a video platform, not a video conferencing service. This could be a natural tie-in for an acquirer. At $7 billion and presumably some premium on top of that, It would by no means be a cheap acquisition, but I could see it being successful. Not that that's a reason to buy it, but by no means encourage investors to buy Vimeo based on their belief of an acquisition, but I wouldn't be surprised to see that happen at some point in the future.

Sharma: That is very intriguing, because I remember that Zoom floated its guns. I think it was this year. They were generating all this cash, maybe $1+ billion. I'm sure we could pull the exact figure. I know there was at least $1 billion of cash flow last year. Why did they need to raise whatever was close to another, a couple of billion dollars in cash? Why did they put that on their books this year? Because they are loading their guns. This is interesting, Emily. The other thing that's very interesting in what you're proposing is that Zoom has a market cap of $100 billion, and we've seen other companies like Twilio just use their stock or use a combination of stock and cash. Pull a couple billion dollars out of the bank, use some stock. I don't know, $6-$8 billion, and there you have a deal for Vimeo, which is interesting because then Zoom becomes like Godzilla, like, "Get out of my way now. There's nobody left. I'm unchallenged in this field." Not the Godzilla ever verbalizes, and why don't they let Godzilla talk in the movies. Isn't always Godzilla all action and no talk?

Flippen: You can't humanize the bad guy.

Sharma: He is a lovable bad guy though. It is interesting because I'm going back to my college days and reading Paradise Lost by Milton, and he made the bad guys sound so enticing. [laughs] All the fallen angels were much cooler than all the angels who were trying to set things right. I guess I have a sore spot for bad guys and rogues. Having said that, back to trying to determine if this company is a good guy or a bad guy in terms of an investment. I'm going to leave with one more risk, and then I'm very eager to hear your final take on this, Emily. That's simply that the company has a tech stack that relies on third-parties. I mentioned this a little bit earlier, they use Google Cloud Services, Amazon S3, and what they say are multiple CDNs, Content Delivery Networks. This is a risk just because you don't control the servers ultimately that your content is going across, and you're prone to being down if they're down. Just by coincidence, as we record today, a lot of the Internet was down because of a content delivery network called Fastly, which is a company I own stock in, a great company. There was a worldwide outage for several hours. Vimeo was among several names listed as these major sites that crashed. But how much of a risk is that? If you're down with everyone else and even Amazon and Google had parts of their websites that were down, if you're down with the Googles and Amazons, no one's going to point a finger at Vimeo and blame it. That the ultimate party is a third-party here, which is Fastly, at least for today. 

Flippen: That's true, but if you're talking about becoming the one-stop shop for this integral aspect for enterprise customers needs. I think the near 100% uptime has become the base of our expectation for enterprise customers, and when you use so many third-party services to provide your service, then that gives you a lack of control. I could see you're tating some enterprise customers especially when you talk about competition from the Alphabets of the world. If they choose to make a more concerted effort or even Zoom, all of which have better uptime. I think that's a fair risk to point out. I guess I'll end off here by saying, I don't think this is a bad company by any means. Not the way that I did when I first heard that Vimeo was headed to public markets. I will say I felt better after parsing through their documents. But I am by no means interested in buying shares of this business today. I don't understand where it's place is in the world, and for that reason I can't quite wrap my head around it.

Sharma: I think similarly, it's good to know that it is no longer this poor cousin or failed competitor to YouTube, it's so much more. I love where it's playing. I think it's got a lot of potential, but I'm disappointed in this first introduction to investors. That management wasn't a lot more specific on how they can make this company the next greatest thing in the video market. They presented to the investment community a company that's done a really good job of pulling tools together, and reinventing itself very recently where they I think fell short of the mark is building the buy thesis for an investor who has other choices. Who can go out and buy a Zoom today, which has extremely stable revenues and a lot of interesting products. We just talked about one on the near horizon. For now, for me this is like an outer area watch-list stock. It's not even at the center of my watch list. I'm going to follow it, I've been proven wrong [laughs] so many times before, it would be foolish of me not to keep this on my watch list. But it's not one that I'm as quiet as excited about as I was when I skimmed through the financial set at first splash.

Flippen: You're preaching to the choir there. Although, Asit, I always appreciate you coming on, and providing your thoughts even if we see eye to eye.

Sharma: One of these days, we're going to have a drag out disagreement on a stock.

Flippen: I can't wait.

Sharma: We'll figure out which stock that is, and then do it live.

Flippen: We'll have to. Maybe it will be Lemonade. I was chatting with you the other day about Lemonade. That's a consumer-basing business, right?

Sharma: That is one we could argue over. Although I don't know how fiercely, we could argue over it for sure.

Flippen: Sounds good. I'd love to schedule it. Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out to say "Hey," shoot us an email at [email protected] or tweet at us @mfindustryfocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Asit Sharma, I'm Emily Flippen. Thanks for listening and Fool on!