background image

Zoom - $500 and Beyond

Equities 5 minutes to read

Danny Khoo

Sales Trader

Summary:  Zoom Video Communications has risen 55% in the last one month and is now trading above $500 at an all-time high. On a valuation metric, Zoom market capitalization of $142 billion does seem steep given a forward revenue outlook of $2.39 billion in 2021, representing a price/sales ratio of 59.4x. If we assume a similar profit margin of 28% (like in 2Q), forward price earnings ratio in 2021 would be 212x, which is high by any measure. Is there further upside for Zoom then?


Market Stats

Price: $500.53

2021 Forward P/E: 212x

Market Cap: $142 billion

1 year return: 524%

 

Zoom (ZM:xnas) has established itself firmly as the de facto standard for video conferencing after being the first mover to provide remote working solutions when Covid-19 hit in March 2020, evident from sales figures which are up 4.5 times from a year ago. Zoom’s platform is known to be intuitive, easy to use and managed by anyone.

 

Strong growth set to continue

This pandemic has forced companies around the world to transit to remote working. Due to the benefits of this accelerated trend like higher productivity and commercial rent savings, we think that firms will continue to embrace  a future of working, learning and communicating remotely.

 

In the recent month, Zoom reported 2nd quarter revenue of $663.5 million, compared to $145.8 million a year ago, up 355% y-o-y. Net income came in at $185.7 million versus $5.5 million last year.

 

They have also grown their customer base with 370,000 corporate customers with more than 10 employees, a rise of 458% from 2Q 2019. Recent onboarding of large MNCs like Exxon Mobil and Activision Blizzard will continue to contribute to their growth, with the revenue outlook for FY2021 expected to be $2.39 billion, up from just $0.62 billion in FY2020.

 

Low cost structure & Strong balance sheet

Perhaps the strongest point to make with Zoom is their high net profit margin of 28% attained in the recent quarter. Given Zoom’s low operating cost and zero debt, growth in their user base would directly translate into strong earnings and a decent cash position over time. This can be seen in their 2Q free cash flow which stands at $373.4 million under a $663.5 million revenue base and accumulated cash + marketable securities of $1.5 billion.

 

In this era where many tech firms command high valuations just from revenue growth but with zero or negative earnings, Zoom stands out as one that has reached profitability way sooner than expected. This means that their cost of doing business is reasonable relative to their pricing power in the market and they have also managed to scale up their teleconferencing business tremendously this quarter while keeping capital expenditures at a reasonable $27.9 million.

 

Risks

Competition in the video conferencing space has set in after the second quarter this year with many other players entering the market. When security issues plagued Zoom in April 2020, Microsoft took advantage and tried to convince Zoom users to switch to Microsoft Teams. Many other players like Cisco Webex, Google Hangouts and BlueJeans have also started to market their corporate plans to global firms which might depress margins and take away Zoom’s market share.

 

On a valuation metric, Zoom market capitalization of $142 billion does seem steep given a forward revenue outlook of $2.39 billion in 2021, representing a price/sales ratio of 59.4x. If we assume a similar profit margin of 28% (like in 2Q), forward price earnings ratio in 2021 would be 212x, which is high by any measure.

 

Conclusion

Whether the pandemic rages on or the discovery of a vaccine slows it down, some of our new remote working habits might be here to stay. We see an excellent business model that Zoom has built with its low cost structure and decent pricing power that will benefit immensely from this new global trend.

 

However, valuations now are prohibitively expensive. Short term traders might want to ride this uptrend but longer term investors should consider sitting out until earnings can justify the steep valuations.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.