Zoom Q1 2020 – Zoom by nature

All priced in.

• Zoom reported very strong Q1 2020 results on all levels as far more customers than expected paid up for the service amid the flood of free users caused by the pandemic.
• Q1 2020 revenue / EPS were $328m / $0.09 compared to consensus at $203m / $0.01.
• Customers paying more than $100,000 per year was up 90% to 769 and customers with less than 10 employees were up 130% YoY to 265,400 providing Zoom with a wide and strengthening customer base.
• The concern going into these numbers (me included) was that the vast majority of the huge jump in users were on the free package where conferences are limited to 40 minutes only and that most corporates had gone for Microsoft Teams which is packaged with Office 365 at no extra charge.
• However, Zoom’s superior user experience and the fact that it has reacted quickly to patch the shortcomings in its service has not put companies off from signing up.
• The result was that guidance was also way above expectations with Q2 2020 revenues / EPS of $497.5m ($495m-$500m) / $0.44 – $0.46 which was also way above expectations of $224m / $0.11.
• This strength is expected to be reflected for the rest of the year with 2020 revenues / EPS of $1.8bn / $1.25 expected which is roughly double what consensus was forecasting for revenues and treble for EPS.
• The company does expect higher churn as many new customers have chosen to pay monthly and so may fall away when offices begin bringing their workers back.
• However, I think this is unlikely as it is going to be a long time before everyone is back in the office at the same time meaning that those at home will still need a virtual meeting service.
• Hence, I think Zoom’s growth will continue through 2020 at both the top and bottom line.
• A lot of criticism has been levelled at Zoom, but I see the problems it has experienced as typical of the sorts of problems that any company would experience when it suddenly becomes a household name and growth goes exponential.
• I think that Zoom has executed well against the challenges that it has faced during the pandemic and as such, it has carved itself out a space in this market.
• The big question as always is the valuation of this business and this is where I run into difficulty as usual.
• Following Q1 earnings, the shares are trading at $224 which puts the company on a 2020 PER of 179.2x.
• If the company grows earnings 100% in 2021 and 100% again in 2022, the company will still be trading on a PER in 2022 of 45x.
• Seeing as I can buy Microsoft (much less exciting but far more reliable) for 31x 2020 PER now, this looks to me like a better bet.
• This is especially the case since Microsoft is the global no. 2 is by far the most important trend to emerge from the pandemic: the cloud.
• Hence, this is where I would remain if I was going to take a position to benefit from the continued impact of the pandemic on the technology sector.