During these tough times, you have undoubtedly heard of Zoom Video Communications and might have even used their products. They allow people to connect on video so they can communicate face-to-face. Through its main Zoom Meetings product, people anywhere can log in to their computers and speak while looking at each other. It is not just one-on-one video conferencing, either. Many people can connect at once. There are also other products, such as Zoom Phone, Zoom Chat (share messages, images, files, and content), Zoom Rooms (broken out into different spaces to improve work collaboration).
There are free and paid services. Its no-charge offering gives hosts access to Zoom Meetings with the main features while limiting the time and number of participants. Clients clearly find value in Zoom’s paid subscription offering since the company has rapidly been signing up more users. In particular, Zoom has increased the number of larger customers, which typically sign up for a year. The number of customers with more than 10 employees grew from 25,000 in 2018 to 80,000 in 2019. For customers that contribute more than $100,000 of annual revenue, these grew 4.5 times from 143 to 641 over that time.
Obviously, this is an important product during the pandemic when many individuals are largely confined to their homes and have limited access to traveling to the office, school, or social engagements. With more people seeing the value of Zoom’s virtual meetings saving time and money, the company has a lot of growth in front of it.
Zoom does have competition, including large companies. This includes Microsoft Teams, which is a comprehensive offering that provides customers with a one-stop approach since it is integrated with Microsoft Office. Zoom’s products have the advantage of simplicity. It is easily set up, user friendly, and has a nice interface. Google also has an offering that is integrated with the company’s other platforms.
We’ll certainly keep an eye on how the competition shakes out. While these well-heeled competitors are daunting, Zoom, with its focused approach, is more than holding its own.
Financial Analysis & Growth
Zoom was doing very well heading into this year, which was before the pandemic changed everyday life. Revenue was doubling annually. Last year, the company’s top line went from $330 million to $625 million.
What’s even more impressive to us is that this was accompanied by improved profitability. Zoom went from essentially breakeven in 2017 to a $25 million profit in 2019.
But hold on. This year of 2020 has been astounding. While the pandemic accelerated organizational acceptance and growth, customers are finding its products solve their needs and are willing to pay for them. In the future, companies and organizations are still going to rely on Zoom Meetings to save money on travel.
For the third quarter of 2020 revenue was up an astounding 370% year-over-year to $775 million. That’s almost 4X growth. There are now 435,000 customers with more than 10 employees, up almost 500% from a year ago (that’s 6X - 6 times). Another key metric, the number of customers contributing more than $100,000 of annual revenue, grew 135% to 1,300. Profit jumped to $200 million from the breakeven year ago period.
Revenue growth isn’t slowing anytime soon, either. Management’s guidance for next quarter calls for revenue of $810 million, 330% higher than last year’s $190 million. Again this is 4X.
When we look at Zoom’s balance sheet, we like what we see. Unlike other high-growth companies, it hasn’t piled on debt. In fact, the balance sheet is stellar. There was $1.9 billion of cash and only $70 million of debt.
Reflecting the strong growth, the stock has been on a remarkable run this year. It started 2020 at $67 and zoomed to $590 in October, an all-time high. The stock has sold off since then after data regarding COVID-19 vaccines became clear.
With the company’s video product making it so easy to jump into a meeting, we don’t see organizations going back to the old way of doing business. While Zoom is useful for family members to get together during these trying times, it will also work when the pandemic subsides and relatives can’t travel for whatever reason.
Zoom has capitalized on the pandemic. We don’t believe the conventional wisdom that once the vaccination is out, that the growth story is over. After all, the company had already been growing rapidly before the pandemic hit, and as more organizations sign up, the benefits become obvious.
Some people have a hard timing buying a stock that has already doubled or tripled after they discovered it. We are here to tell you that we believe the stock has the potential to grow by a factor of 10 over the next 10 years. Sure it would have been great to buy it at $100, but we didn’t. At less than $400, down from almost $600, the market is giving you an opportunity to buy a company that is growing at astronomical rates, is profitable, and has no foreseeable end to this growth rate in sight. This company appears to us to be like Twilio. We added the stock at $52 in 2016 and it is setting new all-time highs around $350 as we write this in December of 2020. We always said Twilio could be a 10-bagger, currently now at 7X. Zoom is a potential 10-bagger. From here!
We are initiating coverage with a $570 Target Price and a $318 Sell Price.