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AnalysisU.S.

Is the post-pandemic boom over for Zoom?

When the pandemic first emerged, it forced people and economies into lockdown around the world. Work from home became the default, and with it came the growth of video conferencing. The technology for video conferencing is already many years old (FaceTime, Skype, etc.), but the pandemic pushed the technology into the spotlight — and Zoom became the poster child for this suddenly new-old technology.

Zoom’s video conferencing service was intuitive and easy to use, even for beginners. All you had to do was to click on a unique link and it would automatically transport you to meeting anywhere in the world. No need for clunky installations or confusing setups. Due to its popularity, Zoom became (and still is) synonymous with video meetings around the world.

Riding on a wave of investor euphoria, Zoom’s stock price hit an all-time high of US$559 in October 2020. But since its peak, its stock price has crashed by over 60%. Is the post-pandemic boom for Zoom all over?

Zoom and gloom

In its latest Q3 2022 earnings call, Zoom declared 35% year-on-year growth in quarterly revenues to US$1,051 million. The company has also been profitable since 2019, sits on a cash pile of US$5.4 billion, and remains debt free. So why its stock price come to crashing halt?

Because growth is slowing down.

Zoom revenue (in USD millions). Source: Zoom Video Communications

While Q3 2022 revenue was a record US$1,051 million, it was only 2% growth sequentially when compared to Q2 2022. To add to that, the management also guided that Q4 2022 revenue would essentially remain flat. Zoom’s growth has fizzled out.

But this is not a sudden trend. From the chart above, it’s obvious to anyone that growth slowed significantly from Q3 2021 (November 2020 on the calendar). And if you look at Zoom’s stock chart, that’s when its price started tumbling down.

The cycle of investor emotions

Zoom is a classic example of a young growth stock caught up on a wave of investor euphoria. As the pandemic raged on around the world and the boom in video conferencing followed, investors one by one jumped onto the Zoom bandwagon pushing the stock higher and higher. The traditional business fundamentals did not support the valuation, but as long as the growth was there, the price was ‘justified’. Until it no longer did.

The savvy investors and master traders would have known that Zoom was a momentum play and got off before the music died, but the investing public who did not are the ones left holding the bag.

The cycle of investor emotions

The future of Zoom

Of course, everything that I’ve described above is based on hindsight (although it’s a familiar story that plays over and over again). But that’s all in the past. How will Zoom fare moving forward? And is the stock worth a look at now since it’s fallen over 60% from its peak?

Let’s first look at the good stuff.

Despite its privacy issues, Zoom arguably has a great core product that’s popular and easy to use. It was that ease of use in the first place that led to Zoom’s pandemic boom. And Zoom has managed to hold onto its market share, and even grow it post-pandemic.

According to research done, Zoom’s global market share increased from 26.4% in 2020 to 48.7% in 2021. This was followed by Google Meet (21.8%), Microsoft Teams (14.5%), and Skype (6.6%). Along with having the largest market share, Zoom is also the most popular video conferencing platform in 44 countries.

And although growth has slowed down, Zoom still has room for growth. It is still a relatively young company in an industry that’s enjoying tailwinds as hybrid/remote work arrangements become the accepted norm.

While most of us associate Zoom with video meetings, the company also offers other products including webinars, events, chat, cloud phone, and virtual conference rooms. This gives Zoom the opportunity to upsell a unified suite of communications solutions to its existing user base of 512,000 customers according to their needs.

CFO Kelly Steckelberg highlighted this during Zoom’s latest Q3 2022 earnings call:

‘When you think about Zoom Phone, for example, and Zoom Rooms, the strategy is to sell into an existing installed base, which by definition just means these customers are going to grow larger and larger and contribute more over time.

And then from a marketing perspective, we’ve grown so much brand awareness that now we’re really focusing on ensuring that everybody knows — everybody who knows about Zoom Meetings now also knows about Zoom Phone and Zoom Rooms and the other solutions that we could bring to bear for them.’

On the other hand, Zoom faces stiff competition from larger, more established players — like Microsoft and Google — who have the scale to compete globally and the resources to invest in R&D to develop better products. Microsoft and Google also have an entrenched user base of enterprise clients which they can seamlessly migrate to their own video conferencing solutions.

Zoom also has a narrow economic moat. While some users may stick to a video conferencing app due to inertia and familiarity, there is really nothing preventing them from choosing a different provider if a better/cheaper alternative comes along — which is how Zoom burst onto the scene in the first place.

Stock valuation

As of 20 December 2021, Zoom is trading at just below US$200, which gives it a trailing P/E ratio of 52.6. In comparison, the overall U.S. software industry has a P/E ratio of 38.

A growth company can normally justify a higher P/E – if the growth is still there. And as we’ve seen for Zoom, growth has slowed down significantly and analysts forecast that the company will only grow revenues by 15.9% for FY2023, so we may see more P/E compression for the stock moving forward.

The fifth perspective

COVID-19 was a perfect storm for Zoom: an unprecedented global event that thrust the company centre stage as a world in lockdown searched for a solution to communicate with family, friends, and colleagues.

As a growth company in a fast-moving, competitive industry, investing in Zoom would require an investor to monitor its stock regularly. Keeping up to date with the latest news, results, and earnings call is key to staying on top of your investment. While it is unlikely that Zoom will hit the supercharged growth rates it enjoyed during the pandemic again, it has nonetheless built a solid foundation for future growth.

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This article was written in collaboration with Futu Singapore Pte. Ltd.

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Adam Wong

Adam Wong is the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller's List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller's List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.

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