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Zoom Video Communications (ZM), a business software company that has risen by nearly 63% since the close of its April IPO launch to a market value of $27.5 billion, has become a star in an otherwise failure-studded 2019 IPO field. Zoom has made a substantial profit, while Uber and Lyft are struggling. Zoom’s up-and-coming cloud-based video service has even succeeded in the face of established tech giants like Cisco (CSCO), Microsoft (MSFT) and Google (GOOG). Tom Roderick of Stifel Nicolaus points to the fact that Zoom has managed to report triple-digit growth over each of the past three years as a sign of interest among corporate users in a market that “most thought was already solved,” according to a column in The Wall Street Journal. The big question now is how high this richly-valued stock can go in 2019.
- Zoom sells corporate video communications services
- It has a subscription revenue model
- It is winning against Cisco, Microsoft, Google
- It has seen a 60% stock gain since close on first day of trading
- It has a $27.5 billion market value
Source: Yahoo Finance
Zoom’s Rise to the Top
Zoom’s stock price has been strengthened by the company’s first quarterly report, released June 6. The company has been able to generate a profit, which sets it apart from other, more prominent IPOs like those of Uber and Lyft. A report by Barron’s also points to Zoom’s “just works” service and its “attractive subscription revenue business model” as potential reasons why corporate customers have chosen its products over better-established rivals like Cisco’s WebEx or Microsoft’s Skype. The company also enjoys exceptional product traction, according to Gartner analyst Frank Marsala, with a reliable service even when faced with problematic bandwidth. Marsala explained that “Zoom is differentiated from other meeting-solution providers due to its focus on ease of use by eliminating barriers typically associated with video collaboration,” per Barron’s.
Another component of Zoom’s early success may be its “freemium” model, which allows basic videoconferencing capabilities for no cost. Customers can pay for additional features through more advanced plans which begin at $14.99 per month. So far, the strategy has paid off, with Zoom’s revenue climbing by 118% to $330.5 million in its most recent fiscal year.
What It Means
While Zoom has posted impressive figures so far, some analysts see the future as a more critical stage for the company. Family Management CIO David Schawel explained to Barron’s that, “in order to make the valuation work, buyers of Zoom need substantial revenue growth for many years in a row in addition to expanding margins. Further, this also assumes the company’s competitive position stays intact.” While Zoom’s IPO prospectus presented substantial opportunity in a growing cloud communications market, competitors like Microsoft and Google enjoy substantial advantages of funding and brand recognition. In the latter category, Zoom has already run into issues: another report by Barron’s reveals that Chinese wireless communications equipment manufacturer Zoom Technologies saw its stock price more than double in the immediate aftermath of Zoom Video’s IPO. It seems that many investors confused the two companies.
Name issues aside, Zoom Video also faces other barriers to future growth, including rising costs associated with the expansion of its Zoom Phone service. With the stock above 40 times forward sales on June 7, immediately following the release of the quarterly report, perhaps those pouring money into the latest hot IPO should be a bit more cautious.
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