Zoom Video is Pointless to Have Around

I have no position in Zoom nor have I ever held any, but I NO IDEA why a company like ZOOM Video is first of all around and if you can make an argument for its existence, WHY is it trading at such high valuation multiples relative to companies (Microsoft, Google, Cisco, Google) that have more compelling growth profiles (with the financial wherewithal to pursue those paths) and / or either offer a competitive service.

Better Substitutes:

Zoom’s revenue growth has definitely stalled recently, and while the market has revised price for it, it hasn’t adequately done so IMO. There might be a hybrid model going forward, but folks will eventually have return to the office, what do you think the large corporates will do with the real estate on their portfolio? Working remotely might work for some businesses, but in most cases (particularly with those that have large budgets), creativity and productivity will be negatively impacted, and these companies already have better alternatives. Think about banks and law firms, which are already using MS Office applications for their staff, and would rather stick with MS Team. These are extremely sticky relationships that Zoom will never be able to displace and if Zoom tries to build its product offering, it will obviously come at a cost to their already-mediocre-subpar cash flow profile

Financial Profile:

• The company supposedly offers different products, but it doesn’t really provide any segmentation on topline (apart from geography). If their core product offering was growing, they would been making a point of highlighting that
• Company segments customers into two parts: 1) Businesses > 10 employees; and 2) Businesses generating >100K in revenue.
  • 36% of Zoom’s Revenue came from businesses < 10 employees. These by definition (# of people employed) are very small businesses, don’t have significant IT budget, and MORE importantly are most likely very price sensitive. If shit hits the fan, this 36% will evaporate quickly   
  • Cost of acquiring these customers (generating > 100K in revenue) has been increasing over the years, while the LTV / CAC ratio (a key metric that you look at for tech companies) has just never been compelling enough to warrant such a valuation. For acquisition costs, I am factoring in 25% of COGS and allocating 100% of R&D, Sales & Marketing, General & Admin – while the 25% is an assumption, for the rest of the cateogries, the company states that the primary cost in the other buckets is personnel costs. You can agree/disagree with the exact %s here, but the thesis, doesn’t change i.e. LTV/CAC is poor (and has been falling) over the years. For LTV, it’s the gross margin on these largest accounts that presumably the company has been challenging its sales and marketing efforts towards. An IDEAL  LTV to CAC ratio should be 3:1, while for this company it’s been ~0.2 and more recently has trended to ~0.1. Sounds great to me. This becomes even more abysmal to view when you understand that bulk of company’s stock compensation over the years has gone to sales and marketing folks. Either they are hiring total incompetent staff (so their hiring policies are not great) or the product itself is so poor (and there is no need for it) that the sales folks can’t really do much. I am willing to bet that it is a combination of both reasons
  • Lastly, the productivity ratio of the company, which I define as (Revenue / Employee: Average Employee Salary) isn’t great either. Initially, it was 1.19x (when they went public) and though it’s gone up to ~1.9ish more recently, it begs the question if the company’s products were THAT HOT, why aren’t they bringing in more top-line especially keeping in view the acquisitions that they have made over the last couple of years (to the tune of more than ~$300 million). Again, same argument as before, either incompetent staff, whacky hiring policies, no need for the service, and / or just poor capital allocation   
  • I also believe that the company misleads investors and is trying to paint a more rosy picture of its Free Cash flow by not including adjustments that it should make otherwise. Why are “marketable securities”, which are short term investments being classified in the cash flow from investing activities, AND NOT operating cash flow, sounds more like a working capital item to me. PLUS, they re not really factoring in acquisitions only stuff relating to PPE. If you start incorporating all these adjustments, you notice that their cash flow profile is just plain terrible – they’ve gone from a 4% margin (Cash Flow / Revenue) to an outstandingly negative 40% in 2022  

Legal Proceedings:

In recent memory, I also really can’t think of any such TECH DARLING that got ensnared in either litigation or had security breaches happen on its platform since going public this  soon or in a relatively short amount of existence. Think about it, if the technology and all was REALLY that good, would such events happen? These black swan events, in my view, point to the fact that there is nothing propretiary about what this company is doing. I haven’t even looked to explore patents (or lack of) because the offering is so basic (it is essentially Skype) that it would be a futile attempt to investigate  

Valuation

This just amazes me that on EV / Revenue basis (applicable for high growth companies or companies that haven’t fully ramped up yet), Price to Book Value, Price to Cash Flow Basis and Price to Earnings basis, the company just trades at a high premium (keeping all the above in mind) relative to the average of the following analogues (Cisco, Microsoft, Google, Amazon, Sales Force) and has INFACT traded at higher levels since its public-markets debut compared to the levels during either the post IPO years for the analogues or since these analogues have come to the market (i.e. went public). I know that Amazon doesn’t really have a video conferencing platform unlike others, but the reason behind selecting it was because it came to the market with something unique that did not exist before yet didn’t get the same valuation. Same goes for Google (Google Meet), Salesforce (Slack), and Microsoft (Teams/Skype. Now these companies (excluding Amazon) but including Cisco, which offers Webex, are still not being priced that highly as Zoom is (for which the only reason I can think is maybe the regulators break the tech giants up, but that is too much time consuming and too much hassle for regulators, so I doubt it, plus it’s not as if these companies will give up their land that easily) so, which again begs the question (and makes me sound like a broken record) that why is Zoom being looked at so favorable when it neither has ANY competitive moat, nor does it really have a strong financial profile or a track record of executing its goals. Yes, it’s board of directors and all may be impressive, but these are not the folks on the ground running the company.

I would Short Zoom like No Tomorrow.