Zoom – Great company, terrible stock.

Zoom goes from app to platform.

• Zoom is moving to offer more functionality on its service with the aim of becoming a platform and maintaining and growing the huge user base that it attracted during the pandemic-related lockdown.
• While I have great admiration for this management team that has done an excellent job at dealing with adversity, the shares remain ludicrously overpriced.
• Zoom has launched a platform called Zapps which provides service providers with an API by which they can embed their services into Zoom’s service.
• Previously, Zoom has allowed its app to be embedded into the services of others but now others have the opportunity to embed their services into Zoom.
• The fact that it has a few good services available at launch is testament to how good the Zoom user experience is and re-enforces the notion that it is here to stay.
• Good examples of this are Slack where users can launch sessions directly for groups in Slack, Box and DropBox to make file sharing easy, Asana to improve workflow management and so on.
• Zoom is also adding to its own functionality to make it easier to create, manage, sell and monetise virtual events on the platform.
• The idea here is to ensure that it is so easy to create and manage virtual events on Zoom that no one would want to look elsewhere because one always wants the event in Zoom anyway.
• What often happens today is that a session in a conference is managed and run in Zoom but is then piped into a larger platform which is where the conference or the event is being held.
• It is this that Zoom is aiming at and given its excellence in the user experience, I think it has a fair chance at success.
• The more it can expand the reach and depth of its services the greater the opportunity it has of keeping users on its platform when the pandemic eventually subsides and most importantly the greater the opportunity to cross-sell other services.
• It is clear that Zoom is confident that its video conferencing service is the best available and following extensive testing of all of the others, this a view with which I concur.
• This means that users will increasingly choose to use Zoom creating pressure for other 3^rd party services to ensure that they work with Zoom.
• This is exactly how Apple built the iOS ecosystem which is still in a very strong position and there is nothing sight yet that has a chance of knocking it off its perch despite its 13 years of age.
• On top of the great user experience, I have confidence in Zoom’s management team which very effectively dealt with the privacy and security issues that were thrust upon it when its usage exploded with no warning.
• It has resolved these issues and also come to great scale with only a few minor glitches which is no small feat for what was a pretty small company before the pandemic.
• Hence, I think that Zoom has a bright future ahead of it and I think it will see off its rivals without too much difficulty.
• However, while the company doing exceptionally well, the shares have travelled far beyond what any rational investor could possibly stomach.
• Zoom now has a market capitalisation of $145bn and is trading on a staggering 107x 2020 EV/sales and 472x 2020 PER.
• This is three times greater than the PER of the Nasdaq 100 index when it peaked during the internet bubble.
• These kinds of numbers clearly demonstrate that there is no fundamental analysis going on at the moment and the worrying thing is that economic reality always reasserts itself in the end.
• Hence, Zoom will either go sideways while the earnings catch up and reduce the valuation or there will be a huge correction once the technology bubble created by endless easy money finally bursts.
• Zoom is a great company but the outlook for the shares is dire and shirts are likely to be lost at some point relatively soon.