Zoom Video Communications, Inc.


Ticker:                          ZMNature of Business:    Technology ServicesLocation :                              USA
Recent Price:           $310.46     52-Week High/Low: $588.84/149.16Estimated Fair Value:      $197.00-$214.60
Expected Return:    17.1%Consider Buy:                   Below $214.16Business Risk:                     High
Financial Risk:      MediumEconomic Moat:               StrongCorporate Governance: Strong

Company Overview
Zoom Video Communications Inc. (ZOOM) was incorporated as Saasbee Inc. in April 2011. The company’s name was changed to Zoom Communications Inc. in February 2012. It was later renamed Zoom Video Communications Inc. ZOOM provides video conferencing services through its Zoom Meetings and Zoom Webinars. The company launched Zoom Phone, a cloud-based telephony solution, in 2019. The other products of ZOOM include Zoom App Marketplace, Zoom Developer Platform, Zoom Chat and Zoom Conference Room Connector.

Research & Development (R&D) lies at the core of its growth strategies. Its R&D facilities are based in the USA, India, Singapore and China. R&D spending has averaged 10.5% of revenue over the past five years. Zoom Developer Platform was developed to enable third parties to build and integrate their applications with ZOOM. Keybase, Inc. was acquired in May 2020. Keybase provides chatting and file-sharing services to users.

The management team of ZOOM is led by Eric Yuan, the chief executive officer and founder of the company. The oversight function of the board is carried out by ten directors which include Jonathan Chadwick, Peter Gassner, Kimberly Hammonds and Raymond McMaster.

Investment Thesis
ZOOM surged ahead in the web conferencing market against the backdrop of the COVID-19 pandemic. The need to curtail the spread of the virus made physical meetings undesirable. People had to work, school and connect with others from home. Therefore, video communication platforms like ZOOM provided some succour.

The growth of ZOOM was phenomenal; its products are widely accepted and many people find them easy to use. In addition, meetings can be recorded and content can be shared through its Share Screen feature.  Subscription to ZOOM products grew rapidly leading to an upsurge in earnings. The revenue of $2.7 billion announced for the 2021 financial year amounted to a 159.6% increase on a 3-year Compound Annual Growth Rate (CAGR) basis. Furthermore, revenue from all geographical areas expanded. Revenue from the Americas swelled by 265.9% year-over-year. Europe, Middle East, and Africa (EMEA) had the greatest revenue increment of 586.8% from $70.9 million to $486.8 million. Asia-Pacific (APAC) grew revenue by 550.7% in a year. Revenue from outside the Americas increased by 571.7% to $819.7 million in 2021. 30.9% of total revenue was realised from outside the Americas compared to 19.6% of the prior period.

We expect ZOOM to grow at a slower rate as more COVID-19 vaccines become available and life returns to what it was pre-COVID. But some of the changes COVID-19 brought to social and work life will remain with us. Many businesses will still allow workers to work both on-site and remotely. Video communication and other productivity tools would be in demand by individuals and organisations. ZOOM, in our opinion, is positioned to take advantage of the opportunities the digital era affords. Continuous innovation has enabled the company to enhance its product features such as the newly added security feature.

ZOOM can integrate easily with tools developed by companies such as Google, LinkedIn, Salesforce and Slack. This partnership allows entities to use ZOOM with the other productivity tools they are already using. Besides, its Software Development Kits (SDK) was broadened to enable developers to integrate ZOOM into their applications with ease. Billions of Application Programming Interface (API) engagements were recorded in the year under consideration.

However, there is a need for significant investment in infrastructure in order to satisfy the teeming users of its products. The company has to convert millions of users of its free version around the world to paying customers in order to continue to boost revenue. It has to retain the existing subscribers, as well.

ZOOM has a historical Price-to-Earnings (P/E) ratio of 422.1 times. Average Book Value Per Share (BVPS) stood at 25.1 times while the average Sales Per Share was 35.2 times. We put the value of a share of ZOOM between $197.00 and $214.60. Currently, it trades above its estimated value.

Financial Overview
Revenue and profits in 2021 broke all previous records. There was a 325.8% revenue explosion from $622.7 million in 2020 to $2.7 billion in 2021 as COVID-19 forced people and businesses to use cloud-based web conferencing platforms to connect remotely. The revenue increase was primarily due to subscriptions from new customers. Despite a 612.3% increase in the cost of revenue, gross profit jumped to $1.8 billion from the prior year’s figure of $507.3 million. Total costs increased more slowly than revenue, thereby producing an operating profit margin of 24.9% up from 2% achieved in 2020. ZOOM’s operating income of $659.8 million amounted to a growth of 5,097.3% over $12.7 million recorded a year ago. Net income jumped from $25.3 million to $672.3 million.  A net income of $2.40 per share was made for the common stockholders in 2021 compared to $0.10 in 2020.

Profit margins and returns got better in 2021. Profit Before Tax (PBT) margin moved from 4.2% to 25.6%. Profit After Tax (PAT) margin was 25.4%, up from 4.1%. Return on Average Equity (ROAE) was 28.6% while Return on Average Assets (RoAA) was 20.4%.

ZOOM generated a lot of cash in the year under review. Free cash flow reached $1.4 billion or $4.90 per share notwithstanding a 124.5% rise in capital expenditure (2020: $113.7 million or $0.5 per share). The company had liquid assets of $4.2 billion in its books as of 31st January 2021. The liquid assets formed 80.1% of total assets, up from 66.3%. Total assets were $5.3 billion gaining 310.8% in a year; shareholders’ fund added 363% to close at $3.9 billion at the 2021 year-end. Total liabilities were 27.1% of total assets and 37.2% of shareholders’ funds.

Business Risk
Demand may weaken as the pandemic recedes. Increasing competition among video conferencing platforms could harm revenue and profitability. ZOOM must continue to invest heavily to enhance the security of its platform and add additional features in order to remain competitive.

Recommendation: Overpriced

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