Is the Dip in Zoom Stock a Buying Opportunity?

Zoom Video’s (ZM 1.46%) second-quarter revenue topped $1 billion for the first time, but shares fell more than 15% as growth slowed. Shares of Yandex (YNDX) rise, as the Russian tech company buys out Uber’s (UBER -0.89%) interest in several joint ventures. In this episode of MarketFoolery, Motley Fool analyst Maria Gallagher analyzes those stories and shares why Designer Brands’ (DBI -0.82%) amazing second-quarter report glosses over genuine challenges for the business.

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This video was recorded on August 31, 2021.

Chris Hill: It's Tuesday, August 31st. Welcome to MarketFoolery. I'm Chris Hill. With me today, from the Financial Capital of the United states of America, it's Maria Gallagher. Thanks for being here.

Maria Gallagher: Thanks so much for having me.

Hill: We've got apparel retail. We have an interesting transaction between two tech companies, but we're going to begin today with Zoom Video. The highlight of Zoom's second quarter report is the fact that revenue was not only higher than expected, it topped $1 billion for the first time ever. But growth is slowing down and investors really don't seem to like that because shares of Zoom are down 15% today.

Gallagher: Yeah, it was a stellar quarter. Their revenue was about $1 billion, up 54%, which exceeded their guidance, and it was their first billion revenue quarter. Their customers spending over $100,000 is up 131%. They have over 500,000 customers with over 10 employees; their net dollar expansion rate in customers with more than 10 employees is above 130% for the 13th consecutive quarter. They've had strong international growth with international growth up about 62% compared to America's growth of about 50%, and they have a total cash of over $5 billion. I think I don't really understand, it was a really stellar quarter for Zoom. It's continuing to do well, especially compared to last year, with large numbers it's much harder to have that growth over 300% as we had seen in 2020. But they are consistently delivering and with all of that cash, I just think that they're going to continue to innovate and I'm excited to see what they do.

Hill: Yeah, I don't have shares of Zoom Video in my portfolio, and I have to say, I'm a little surprised at this because it really seems like not that there are no switching costs involved. There are always switching costs, the question is always how high are they? Yes, there are some switching costs. But do you imagine a world where people are just dropping Zoom Video? Among other things, I feel like they have set the bar really high for their competitors. It's not to say that they don't have competition, obviously they do, but their competitors, whether they are startups or established tech behemoths, really need to up their game to match the convenience of Zoom Video.

Gallagher: Yeah, it's a convenience as the switching costs and it's the quality, I don't know if you've had any Teams calls or if you've ever used Cisco Webex. I had a couple of other video conferences and it's always been terrible. People are constantly freezing, everyone's dropping out, so Zoom continues to just be the top tier technology for this space, and so they have created such a high bar for competitors and I think they have a lot of loyal customers. If you look at that net expansion rate, they're continuing to cross-sell and up-sell. Their Zoom Phone accelerated the number of customers spending more than $100,000 on that by 241%. They've reached two million Zoom phone seats sold eight months after reaching their first million, so they continue to really show that customers who use them want to continue using them and want to spend more with those platforms and I don't see either of those trends changing.

Hill: Do you look at what's happening with the stock today as a buying opportunity because I would understand this move in the stock today a little bit more, if over the past year shares of Zoom were up 40% or something like that. It's basically been flat for the past year, and so this puts it in negative territory for the past 12 months. That being said, do you look at it as a buying opportunity?

Gallagher: Yeah, it's still quite an expensive stock, but I would look at it as a potential to get in on the company. I just think with that much cash and a really innovative management team who has shown that they can scale up in a really unparalleled way that we saw in 2020. I would put a lot of faith in that management team to continue to innovate in really exciting ways.

Hill: Yandex, the Russian tech company announced it is buying out Uber’s interest in several joint ventures. The joint ventures are in both ride-hailing and in food delivery. Yandex is going to pay Uber $1 billion, and I don't know about you. I'm surprised that shares of Yandex are up 4% today, while shares of Uber are basically flat. What does that hit you about this deal?

Gallagher: It's pretty interesting I'm not super familiar with Yandex as a company, so I spoke with International Expert Bill Mann, who is of the opinion that besides SpareBank and oil companies, Yandex is the single most important Russian company. It's their most valuable publicly traded Internet company. Under this deal, like you said, it's $1 billion, Yandex will take full ownership of its food delivery operations, which is express grocery delivery, fast food delivery, and the self-driving group, which is autonomous vehicles, it has recently expanded its grocery delivery in Israel and France. It's probably to expand in the U.K, and so it's increased its stake in their taxi business. So what's really interesting too, is that Yandex is buying these companies back out of cash flow. It's not raising any more money. I think that people are seeing that Yandex is a really healthy company, and it's taking these really interesting segments and growing with them and having more ownership over them, so I think people are seeing that that's really maybe the more interesting part of the story.

Hill: When you consider that Yandex is roughly a third the size of Uber in terms of market cap, they've had a lot of success, it's still $1 billion, it's still a decent size check for them to stroke. One of the things I was wondering is, does Yandex have a good history of capital allocation? Because that among other things, including the comments from Bill Mann that you relate, that would explain the stock moving up 4% at a time when they're writing a check like this.

Gallagher: Yeah, I think so in 2018, that was when this deal was struck and I think it was a really smart way for Yandex to grow and now it's growing and it's doing well, and they are saying, “Listen, we're going to take some back and work with these other banks within Russia to grow in that, in all of these different areas that they are the premier option in Russia and expanding more places internationally.'” I think it's pretty interesting.

Hill: On the flip side, you look at Uber and I hope people who own shares of Uber are patient, because this really seems like a business that takes some time to pay sustainable dividends for their shareholders. I know that you can look over a short amount of time here or there and say, “Well, if you bought at this point and you sold five months later than you made money.” But as Foolish investors who like to look for companies we can hold for five, 10, 20 years, I look at Uber and see a business that, as you pointed out, you better expand that out to 20-30 years. Or am I being overly cruel?

Gallagher: For me, I think Uber is a really interesting or a good way to think about. Sometimes really good products are not really great businesses. I use Uber, I use Lyft. I don't think I'd buy stock in either of them. I don't think that unit economics are attractive in this area, especially with the intense competition between Uber and Lyft. I would agree with you, and I just think even if you are a proponent of Uber as a user, that doesn't necessarily mean that the business model is one that you would be excited about.

Hill: Quick programming note, the market is closed on Monday because of labor day. It's going to be a short week for us this week on MarketFoolery so we're here on Wednesday, off on Thursday, and hope that folks in the United States enjoy the long weekend. We're going to close with designer brands, the Company formerly known as DSW. Out with second-quarter earnings. I said at the top of the show we're going to talk about apparel retail; footwear is apparel, am I correct here with --

Gallagher: Yeah, I've got say accounts.

Hill: Okay. Tell me what's going on here. Because Designer Brands' profits and revenue were higher than expected. Wall Street was expecting same store sales growth of 62%, and they came in with comps that we're up 85%. Why is the stock down today? This seems like Christmas in an earnings report.

Gallagher: It was a good quarter. But I just don't know if you dive in a little bit more how bright the future is for this company. We have some positives, like you said, comp sales rep about 85%. Net sales were up about 67% to $817 million. However, they are closing 65 stores. They are closing 24 stores in 2021. An additional 41 will close over the next four years. They only have $46.5 million in cash compared to over $200 million at the same time last year. They burned through a lot of cash in the last year, they don't have a lot left, and they already have $1 billion of debt on their balance sheet. As people are starting, stopping depending on going back in-person, depending on what state you're in, what country you're in. I think that's going to be a really big determinant of how well they're doing. I don't know if their online presence is as strong.

Then, my other negative note about Designer bBands, is the brands aren't that well-known or exciting, but they have partnerships with. They have an exclusive partnership with Hush Puppies, and Jessica Simpson, and some other brands that IP, I don't think it's that strong brand name that can really carry them through the way that some of these other companies you see with a really interesting brand repertoire. I think it will be more successful, so I think it's expensive to operate their stores. I think they don't have the time [...] left. I don't think their IP is that strong, and I think that they are more of an in-store experience and I don't know what that's going to look like in the next year.

Hill: Do you think there is a turnaround for a business like this? You mentioned the store closings. They have about 500 locations, so my hunch is that without even looking all that closely, however many they're closing. They could probably stand closed, maybe double that amount.

Gallagher: Yeah, I think with this a lot of times maybe they can have a really exciting or interesting partnership. They could work more with increasing their online sales and working, creating a more exciting omni-channel experience because I do think they have a lot of loyal customers, I love DSW. I love going to the stores and going and shopping on the sale rack. I do think that they have the potential because the DSW brand, I think it's pretty strong. But I just think that the way they've done it so far, I don't know. I won't have a lot of feedback in the next couple of years. They can super turn it around with the amount of cash they have left.

Hill: If nothing else, I want to thank you for reminding me that Hush Puppies was a brand and apparently still as a brand. I hadn't heard that since I was a kid, so --

Gallagher: I had to look up what they were. I thought it was just a snack.

Hill: That was it when you said that I was like, "Wait, all right, it used to be; when I was a kid, there was a shoe brand." Fingers crossed for Designer Brands. Maria Gallagher, always great talking to you. Thanks so much for being here.

Gallagher: Thank you so much for having me.

Hill: As always, people on the program may have interest 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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.