Please ensure Javascript is enabled for purposes of website accessibility

What the Zoom-Five9 Deal Says About the Nasdaq's Future

By Dan Caplinger - Jul 19, 2021 at 2:03PM

Key Points

  • Zoom is acquiring call-center cloud specialist Five9.
  • But Zoom is doing an all-stock deal.
  • That suggests Zoom thinks its stock is still pricey even after a big drop from all-time highs.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Do companies think the bull market has run its course?

The stock market has been on edge for the past week, and on Monday, stocks pulled back sharply. The Nasdaq Composite (^IXIC 2.09%) actually held up well, falling a bit more than 1% as of noon EDT. Several other major market indexes saw larger declines.

Merger and acquisition activity has increased dramatically in the past year, and on Monday, investors got interesting news from video collaboration specialist Zoom Video Communications (ZM 1.35%). Shareholders in Five9 (FIVN 0.87%) are quite happy that Zoom has made an acquisition bid for the cloud-based contact center specialist. However, some of the details have to make investors wonder what the deal says more broadly about the Nasdaq and its future course.

Person at white desk talking to 12 people on a Zoom call on monitor.

Image source: Zoom Video Communications.

Zoom makes the call for growth 

Zoom's stock was down more than 4% after it announced its purchase of Five9. Five9 shares rose more than 5%.

Zoom's bid for the cloud-based call center specialist values Five9 at about $14.7 billion. Under the terms of the deal, Zoom will give Five9 shareholders 0.5533 shares of Zoom for every Five9 share they own. The companies expect the deal to close in the first half of 2022.

The two companies explained their reasons for the move. Zoom sees the acquisition helping to boost the value proposition from its existing video collaboration platform, identifying the call center market as a $24 billion opportunity to add to its existing addressable market. As Zoom CEO Eric Yuan explained, "Enterprises communicate with their customers primarily through the contact center, and we believe this acquisition creates a leading customer engagement platform that will help redefine how companies of all sizes connect with their customers."

Meanwhile, Five9 CEO Rowan Trollope sees the move helping his company's customers get better access to Zoom features. In particular, Trollope mentioned the Zoom Phone offering, which has been a key direction in which Zoom hopes to expand the scope of its overall business.

Zoom keeps its cash

Plenty of investors are debating whether the acquisition makes sense from a business standpoint. What stood out to me, though, was the way in which Zoom made the purchase.

Zoom finished the first quarter of its current fiscal year with an extremely healthy balance sheet. The company reported $1.56 billion in cash and equivalents, as well as another $3.13 billion in short-term investments. That's nearly $5 billion that many anticipated Zoom using to make a strategic acquisition similar to this one.

However, by doing the all-stock deal, Zoom implied that it thinks its stock price is high enough that an all-stock deal makes more sense. That's not an unreasonable position for the company to take, but it did seem to make Zoom shareholders take pause. After reaching a high of $550 per share last October, the stock briefly dropped below $300 earlier this year, and the deal just seemed to put a stop to more bullish sentiment that had briefly sent Zoom's stock price back to $400.

Hoping for the best

Many are still optimistic about Zoom's long-term opportunities. The company has worked hard to go beyond its core video platform, and positive cash flow will give Zoom plenty of chances to make further acquisitions down the road.

Nevertheless, Zoom didn't give a vote of confidence in its stock price, even at greatly depressed levels. If other Nasdaq stocks are seen as equally overvalued, then it could create the negative sentiment that could lead to a long-awaited downturn for the index and many other high-profile growth stocks in the market.

Dan Caplinger owns shares of Zoom Video Communications. The Motley Fool owns shares of and recommends Five9 and Zoom Video Communications. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Zoom Video Communications Stock Quote
Zoom Video Communications
$109.52 (1.35%) $1.46
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$13,047.19 (2.09%) $267.27
Five9, Inc. Stock Quote
Five9, Inc.
$117.17 (0.87%) $1.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.