Michael Burry is best known for predicting the subprime mortgage crisis that preceded the Great Recession. Lax lending standards and low interest rates led to a housing boom in the early 2000s, but many subprime borrowers eventually defaulted on their debt and the housing market collapsed in 2008, wiping away trillions of dollars in mortgage-backed securities. That forced many financial institutions into bankruptcy, and fallout from the crisis led to one of the most devastating stock market crashes in history.
Burry famously bet against those subprime mortgage bonds using credit default swaps (CDS), a financial instrument that obligates the CDS seller to compensate the buyer in the event of a default. His prescient investments made him a Wall Street legend. Burry personally pocketed $100 million in profit, while making another $700 million for hedge fund clients. Those events were chronicled by the 2015 film The Big Short, which was based on the best-selling book of the same title.
Burry just took a stake in Zoom Video Communications
More than a decade has passed since Burry correctly forecasted the subprime mortgage crisis, but he is just as sharp today. His hedge fund Scion Asset Management soared 160% over the three-year period that ended in the first quarter, crushing the 67% return of the S&P 500 (^GSPC 0.02%). That makes Burry an excellent role model for individual investors.
With that in mind, Burry took a stake in Zoom Video Communications (ZM 0.05%) in the first quarter, and he immediately made it a big position. The stock represents about 7% of his portfolio through Scion, and it ranks as his fifth largest holding. That screams high conviction, and investors would be wise to consider adding the stock to their own portfolios.
Zoom aims to simplify corporate communications
Zoom is best known for its market-leading videoconferencing application Zoom Meetings, but the company aims to be a one-stop-shop for corporate communications solutions. Its platform includes a cloud phone system (Zoom Phone), conference room system (Zoom Rooms), and a customer service solution (Zoom Contact Center), as well as developer tools and other ancillary products for team chat, whiteboarding, and email.
Zoom also offers a growing number artificial intelligence (AI) products. Zoom IQ for Sales leans on AI to analyze customer interactions in Zoom Meetings and surface actionable insights for sales agents. The company recently added generative AI capabilities to Zoom IQ, including the ability to summarize meetings and compose emails. Similarly, Zoom Virtual Agent is an intelligent chatbot that streamlines customer service workflows by interpreting customer requests and resolving issues without human intervention.
The investment thesis is straightforward: Zoom offers a broad range of communications software and services, and its unified platform has a lower total cost of ownership than point solutions because it eliminates the need to maintain disparate products from multiple vendors. Additionally, Zoom's leadership in videoconferencing software, coupled with its reputation for simplicity and reliability, leaves the company well positioned to attract new customers and expand its relationships with existing customers.
The silver lining to lackluster first quarter results
Zoom grew at an explosive pace during the pandemic, achieving a $2 billion revenue run rate faster than any software company in history. But growth has since slowed significantly as digital tailwinds have given way to economic headwinds. In the first quarter of fiscal 2024 (ended April 30, 2023), revenue increased just 3% to $1.1 billion and GAAP earnings plunged 86% to $0.05 per dilute share. But there were also a few bright spots that hint at better days to come.
Zoom breaks its clientele into two cohorts: Online customers are those that provision products through self-service channels, and enterprise customers are those engaged by a direct sales team. Churn became a significant problem for the online cohort as pandemic-driven demand faded, but online customer churn declined to 3.1% in the first quarter, its lowest level in two years.
Meanwhile, enterprise customer revenue rose 13% in the first quarter, and the average enterprise customer increased spend by 12%. That cohort now accounts for 57% of total revenue, up from 52% last year. That trend bodes well for Zoom because enterprise customers churn at lower rates and they offer more upsell opportunities.
Building on that, Zoom Phone reached a critical milestone in the first quarter. It now accounts for more than 10% of total revenue, making it the first product besides Zoom Meetings to cross that threshold. Investors should be thrilled by that news. It indicates that Zoom is successfully expanding beyond its core videoconferencing software.
Finally, remaining performance obligation (RPO) increased 16% to $2.1 billion in the first quarter. RPO is a leading indicator of revenue, and double-digit growth in RPO means Zoom could see its top line accelerate in the future.
Zoom has a long runway for growth
Management estimates its addressable market at $125 billion in 2026, and Zoom is well positioned to capitalize on that opportunity given its brand authority and broad portfolio. Yet, shares currently trade at 5 times sales, an absolute bargain compared to the three-year average of 30 times sales. That's why investors should copy Burry and buy a few shares of this growth stock today.
