Is Zoom Overvalued?
I'm still an intern, but I can't seem to wrap my head around 2000x P/E ratios. Market cap of 100B and operating income of around 25M. What's stopping me from shorting the fuck out of it.
They seem to project a continued growth in revenue at like CAGR 100% (currently at around 600M) which has obviously only grown fast due to Covid.
Most people use it for free, they have no moat of competitive defense, and they have security issues.
People are almost certainly going to be less reliant after COVID, these valuations seem ridiculous. Can anyone counter this argument?
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oh ok
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Probably overvalued but the question is are you really gonna fight the kind of momentum it has. People have been saying Tesla is overvalued for years and look at what has happened even a few years ago when they were consistently missing on execution. Do you really want to risk getting blown up with over 100% losses to make 100% and in reality probably much less than that? I personally think you are putting too much stock in the idea that all the growth expectations are due to covid. Back in 2018/19 I began having interviews done through the service so it's not like people won't use it post covid, and think about how many companies are making wfh at the very least a part time thing so even if offices are back in you will still have a lot of people using the service even if most days they are in the office. Next what are the alternatives, you have teams which imo is superior but even more expensive and then what exactly is left. Absolutely another product can come in but the question is it going to be superior enough to actually gobble share from either teams or zoom given how bad most people are about switching products once one is ingratiated?
I will pop this bubble with my own two hands. Its coming down now.
Hi I work at a small fund named Melvin Capital and we'd be keen to hear your pitch
My peepe grew a whole half inch hearing that
P/E is below 150 currently, which is not that bad for a fast-growing company. Tesla has ~1000 P/E. Peloton has above 200 P/E.
Important to keep track of how post-COVID is handled. If remote work is embraced and continues to be a lions share of how work is done, then logically zoom retains a critical part of society with its only real competitor being Teams. But if we go back to the office, then it's important to track whether zoom is the predominant communication tool used. And i'm quite curious given companies like Bluejeans who do phone dial-ins may never have a place again in the market if people continue zoom subscriptions post being back in the office.
Can't really speak to whether it's currently overvalued given markets have been largely irrational during the pandemic but it's not hard to see why investors ascribe a ton of value to them.
I definitely agree!
P/E is not very useful in this situation. Watch revenue, margins, and overall management guidance.
I think it is overvalued. I think the market is overestimating the amount of revenue that sticks around post crisis. They will also lose market share. Just my opinions though.
Do you think a decline in revenue is almost priced in because everyone knows less people will be using Zoom?
Not necessarily a decline, I meant growth. Some equity research reports I've read show 50% growth YoY into 2022 and then 40% growth for 2023. Not sure I agree with that. Obviously could be wrong. Stock has a ton of momentum and work habits have changed.
The market can remain irrational longer than you can remain solvent
couple of harsh lessons I've learned as an investor
1. just because something's overvalued relative to the history of the stock market does not mean it will crash
2. some companies (AMZN) deliberately keep earnings skinny to aggressively reinvest into their businesses and this artificially inflates PEs (look at PCF ratios and see if they're equally stretched)
3. it's possible a company is overvalued but never meets doom. look at MSFT from 1999-2015, just a dead stock but then came back with a vengeance. while you had dead money for 15y, it's outperformed the S&P and all R3000 indices since its peak in December 1999, ditto for much of the Nifty Fifty that still generated compelling returns post-crash in the 1970s
4. PE in isolation is about as useful as looking at a stocks per share price for clues
5. all investing is a form of value investing, you buy a stock because you think the current valuation doesn't reflect its intrinsic value, so something being high PE does not in and of itself mean it's overvalued
6. it's possible that the metrics we used to evaluate railroads, utilities, and asset-heavy businesses are not appropriate when comparing to high ROA industries like IT and that the "average" PEs we're using for comparison's sake really aren't that helpful
7. it's possible ZM already had its day of reckoning, the stock is down over 45% from its ATH at the moment
finally, check this out from Howard Marks, very interesting: https://www.oaktreecapital.com/docs/default-source/memos/something-of-v…. I think it's impossible to know ex ante whether or not a stock is both overvalued and that you can profit from that knowledge (AMZN has been "overvalued" by traditional metrics for over 2 decades, and look at the performance), so in my opinion it's a good question but not one I have a great opinion on. just because I agree that ZM is overvalued doesn't mean anything really. it only matters if I short the stock and make money, otherwise I'm not invested in it so it's irrelevant to me for the most part. if you are holding onto a position in ZM and you believe it's overvalued, then you should sell, plain and simple.
Great read, thanks. Certainly makes life much harder for investors and could see growth stocks becoming even more detached under these investment rationale. But it is still great that value is being seen in other arenas.
in what sense is it hard?
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