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Point/Counterpoint: Zoom Bulls Vs. Bears

Stock MarketsMay 02, 2020 02:14AM ET
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By Geoffrey Smith and Kim Khan

Investing.com - As parts of the globe begin to ease lockdown rules, with news cases of Covid-19 waning, it’s a good time to take stock of some of the companies that benefited from the new landscape.

Among the most well known of these quarantine stocks is video teleconferencing software provider Zoom (NASDAQ:ZM). Shares have doubled since the start of the year as companies across the globe adopted it to replace the office meeting room. As economies attempt to revert to past productivity, is Zoom still a good bet or will it fall back to earth?

Geoffrey Smith argues that Zoom has risen too far, too fast, while Kim Khan argues that if you say “Zoom” instead of “video meeting” you know how the landscape has changed and it’s attractive for the long term. This is Point/Counterpoint.

The Bear Case

The bear case for Zoom is that it has simply gone too far, too fast. Not just in terms of valuation metrics, although at over 50 times trailing 12-month revenue and 1,500 times earnings, the company is twice as expensive as Slack, another ultra-trendy alternative communications stock.

Zoom’s user numbers for the first quarter will obviously look stellar. CEO Eric Yuan has been quoted extensively as saying that they grew from a maximum of 10 million daily to over 200 million within a couple of weeks as lockdowns spread across Europe and North America.

But how much of this can Zoom turn into cold, hard cash? The first question a potential investor should ask themselves is – how much have you paid so far to use Zoom? If you’re just using it as an individual, the answer is very probably “nothing”.

Even if it isn’t, how much would you be prepared to pay to use Zoom in a world where Apple’s FaceTime, Google Meet and many others are available for free?  What, about the company, is truly unique? Remember, the pandemic that made Zoom will also leave us with no spare cash to throw around on services that we can get for free elsewhere.

Which leaves business customers. These, in fairness, have already helped to make Zoom profitable, in contrast to Slack. But the bear argument says that the company has already lost crucial trust from this segment with its by now well-documented security flaws. Regaining it will be hard, perhaps impossible.

For school boards organizing remote teaching, a single naked zoombomber exposing himself is one too many. For companies like Daimler (DE:DAIGn), the routing of data through servers in China fatally compromises its confidentiality. For government agencies from the U.S. Senate to the Indian and German governments, the thought of those Chinese servers and the crass monetization of data by forwarding it to Facebook (NASDAQ:FB) (Facebook!) has made it an immediate no-no.

Yuan has dismissed these mis-steps as bugs in the business model, but the bear case says they are features, a reflection of an all-too familiar Silicon Valley mentality that places no value on data privacy and indulges its desire to maximize revenue without restraint.

The company has given itself 90 days to fix its security problems. Investors should exercise extreme caution if it continues to generate negative security on this issue thereafter.

The Bull Case

Zoom Video Communications is facing what all trendy stocks – and indeed all trends – go through at some point: backlash.

Zoom has been the stock of the lockdown era and, as it reached what many have called an absurd valuation, it’s facing intense scrutiny.

Looking at the stock right now it’s clear the valuation is through the roof. Technical indicators are screaming short-term sell as well. It’s had an amazing run, but whether it’s still got plenty of long-term potential if you believe Zoom has had a transformation moment. And there’s a good case to be made that it has.

Zoom has become part of landscape, with the its name so synonymous with video conferencing people simply say, “Let’s Zoom.” That’s something that Facebook and Microsoft (NASDAQ:MSFT) can’t encroach on (like when Bill Gates brought out the Palm PC).

Years from now we may be talking about a Baby Zoomer generation.

And the landscape will be different when the economy reopens, making video conferencing and working from home more standard practice.

Despite the confidence from the White House, the United States and Europe are just starting to change their rules. Localities could quickly be back on lockdown at the sign of infections rising and speculation about a second wave will also leave businesses hesitant to revert to how things were pre-pandemic.

Many employees and employers will see the advantages of telecommuting, at least a couple of days a week, and with school closures extended and childcare harder to come by it will be necessity for some.

Business air travel should also decline, not just for safety reasons, as airfares jump and leaner carriers fly fewer routes.

Moving from the broader trends, Cantor Fitzgerald, earlier this month, initiated its coverage of Zoom with an overweight rating, noting they expect "the virus to provide upside to estimates and for the platform and its products to drive increased market penetration and future cross-selling opportunities."

Earnings projections are strong. Analysts, on average, expect that revenue will rise to about $930 million for the current fiscal year, up 49% from $623 million a year ago.

Fiscal 2022 revenue is seen climbing a further 34% to $1.25 billion.

Point/Counterpoint: Zoom Bulls Vs. Bears
 

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Comments (16)
Niranjan Thampu
Niranjan Thampu May 03, 2020 4:01PM ET
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I like the brand and the product but I am just worried about the management. We are seeing a lot of negative news coming from Chinese companies and see how it impacted the stock, for example recently its Luckin Coffee reported wrong numbers, Alibaba's executive's scandals. Zoom reported 300million user and they're corrected as 300 million daily meeting participant (DMP). DMP is not the way to show key metrics- most tech companies focus on daily active users. DMP can be the same person taking 10 calls. In my opinion, Zoom already started giving misleading information. If I am looking at the software side, it's not really true end-to-end encryption. Don't get me wrong, it is secure but it's not end-to-end. I sold 90% of my holdings but keeping 10%. I am sitting on the fence reinvestment.  I agree with some of the comment about FB but remember their strategy is purely social media focuses and not business meetings. Their "workplace" software is already a flop.
Randolph Russ
Randolph Russ May 03, 2020 12:11PM ET
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Zoom run over!!!
Jon Buh
Jon Buh May 03, 2020 11:38AM ET
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Don't INVEST in Chinese firm. Just day trade and get your profits
Kaveh Sun
Kaveh Sun May 03, 2020 11:16AM ET
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At this price, zoom is not investable.
Ken Chao
Ken Chao May 03, 2020 3:09AM ET
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but ZM seems getting more controversy than MTCH, and facing more competition
Ken Chao
Ken Chao May 03, 2020 3:06AM ET
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MTCH got hammered before when FB announced new dating feature, MTCH stock price then recovered afterwards
Fabrice Lange
Fabrice Lange May 03, 2020 2:34AM ET
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I would add an other important thing. ZM is an independant company, not one of the big guys. Companies are careful not to depend to much on this big guys you know. The big guys want to share the leadership of the world. Is it our interest ?
Greg LaMontagna
Greg LaMontagna May 02, 2020 10:57PM ET
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zoom is a household name and who is to say they will not add on services that will be innovative this could only be the start. they could be working on virtual reality. I am interested on their future plans
Phil Kimmel
Phil Kimmel May 02, 2020 4:43PM ET
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Facebook is now challenging with portal. Why wasn’t this mentioned in your article??? It caused Zoom to drop 6% the day this news came out last week.
Fabrice Lange
Fabrice Lange May 02, 2020 4:43PM ET
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not the same market. FB is really in late and serious doubt to secure the data
First Last
First Last May 02, 2020 4:34PM ET
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ZM has the best UX so far. And that is something those big guys never learn how to do it right. I think the main reason is big guys have many toys while ZM is the only one for ZM. I will predict that ZM will be acquired by one of those big guys, just like Youtube bought by Google. Then all the noise of ZM is gone.
Fabrice Lange
Fabrice Lange May 02, 2020 4:34PM ET
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maybe but who ? Oracle ? Apple ? Google if meet is not a success ? or ....?
Fabrice Lange
Fabrice Lange May 02, 2020 3:47PM ET
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Zoom is the best corporate tool. I see Teams as a good challenger. the others (fb, Google) are out for corporate use and about data management we have doubts for FB Google. Cisco was to expensive and not enough flexible.
Joe Bartlett
Joe Bartlett May 02, 2020 2:29PM ET
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I am not an expert but can Zoom command good profit margin on a service many others can provide at little cist? Maybe. Maybe not.
Fabrice Lange
Fabrice Lange May 02, 2020 2:29PM ET
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its target is the companies. best profit margin are here not with individuals.
Joseph Kinyoda
Joseph Kinyoda May 02, 2020 12:41PM ET
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We’re all speculating until we see consistent growth in revenue and profit
Fabrice Lange
Fabrice Lange May 02, 2020 12:41PM ET
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a good investor buy the future not the present ;)
sung Yun
sung Yun May 02, 2020 12:13PM ET
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I don't think zoom is going back because now i know what the zoom is and there r so many apps like zoom. but think why zoom? it is quality. why apple? samsung? it is quality. so don't say zoom is going back :)
yifan yang
yifan yang May 02, 2020 12:11PM ET
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Zoom is backed by china gov.
Jessica Saxton
Jessica Saxton May 02, 2020 12:11PM ET
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So they can keep up with conversations and build facial recognition.
Fabrice Lange
Fabrice Lange May 02, 2020 12:11PM ET
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humm and FB, Google, MS are so cute Angels;))
Adel Mukhetdinov
Adel Mukhetdinov May 02, 2020 6:08AM ET
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Where i  can invest 1000$ in this company ?
Daniel Mitera
Daniel Mitera May 02, 2020 6:08AM ET
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you dont want to believe me. it will drop like rock.
Aniket Khasnabis
Aniket Khasnabis May 02, 2020 6:08AM ET
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I exited zoom last week. better stay safe
George Bazhenov
George Bazhenov May 02, 2020 6:08AM ET
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Open an account with Interactive Brokers, transfer your funds, buy stock.
 
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