Zoom FQ4 2021 & COVID – Social capital

Zoom is growing on the back of a declining asset.

• Zoom reported another great set of results but its success and the ability of its customers to manage through the pandemic has come at the expense of the social capital that corporations have built up over many years.
• As corporations turn over their employee base, this capital becomes exhausted and needs to be rebuilt which is most successfully implemented by having everyone back in the office.
• This is why I suspect that when COVID has been reduced to the status of the annual influenza season that preceded it, things will rapidly normalise across the board.
• Given the increasing evidence of vaccine efficacy and the possibility that the virus mutates much more slowly than influenza before it, I think that this time is sooner rather than later.
• Q4 2020 revenues / EPS were $882.5m / $0.87 both of which were ahead of consensus at $811.0m / $0.48 as the work from home trend continued to drive subscriptions.
• Zoom’s service is still significantly better than all of its peers despite a valiant effort by Microsoft with its pretty good Teams product.
• Zoom’s next port of call is to migrate from a videoconferencing platform into an ecosystem for enterprise services.
• This is beginning with the addition of its Zoom Phone service which boils down to VoIP bringing Zoom into direct competition with the likes of Vonage.
• I am certain that many more will follow, but as a fundamental investor in Zoom, one has to believe that this is going to be a smashing success in order to justify not selling the shares immediately.
• However, Zoom is currently a narrative-driven stock and here one has to subscribe to the work-from-home-forever theme in order not to expect a meaningful slowdown in the company’s growth.
• The company expects to grow revenues another 43% this year which I suspect will be pretty easy to achieve given how growth suddenly accelerated during 2020 making the YoY comparison pretty easy.
• Beyond that, the company needs everyone to stay at home for a protracted period to carry on the growth that the share price demands.
• This is where I think that the problems are going to emerge as employees who have worked together in the same office all know each other pretty well.
• This is the social capital that I think has allowed the work from home trend to be so successful.
• As employees turnover inside a company and everyone stays at home, the level of social capital begins to decline and I think that this will begin to undermine the effectiveness of remote working.
• This is why, I think that in the longer term, employees will need to go back to the office in order to rebuild the social capital that kept companies functioning so effectively during the pandemic.
• The net result is that people will return to the cities once they remember how awful a long commute is and steadily the real estate market, transport and the industries that rely on office working (e.g. coffee shops) will normalise.
• The pandemic has proved that for many companies, work from home can work and so I suspect that this is going to play a greater part in business life than it has in the past.
• However, this is not going to be enough to keep Zoom growing at this breakneck pace and so I can see the stock going down or sideways while the fundamentals grow into the valuation.
• I remain a fan of the company but not the shares.