• Brett Schafer

Not So Deep Dive: Zoom Video Stock



Listen On:

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  3. Apple Podcasts

Show Notes


(Ryan) What they do: Everyone pretty much knows what Zoom is so I won’t go too long on the product. I’ll talk a little bit about all their actual revenue streams, but I think today’s focus will primarily be on Zoom as an investment.


Zoom is a video communications app. And there are a few plans users can sign up for. 1) Basic: This ones free. Limits on the meeting length. 2) Pro: $150/seat for a year. 3) Small Business: This is if you have more than 10 accounts. It’s $200/year per seat. 4) Enterprise: $240/year, starts at 50 licenses. And each step up you get some new perks as well.


But then there is also 3 other products that I think are relevant. Zoom phone, Zoom contact center, and API/SDK.


1) Zoom phone: An enterprise phone system that enables workers to use their desk phones or mobile phones to join meetings. Unlimited calling in US & Canada is an extra $180/year/seat/. 2) Contact Center: They launched this last quarter. This is a basic contact center/customer support line but it’s optimized for video. Still multi-channel tho. 3) Zoom API/SDK: I’m no expert on the world of API’s but my understanding is that this is a bunch of code that other companies can plug in to their own codebase to integrate Zoom’s video functionality into their own offering. Docusign just announced that they were using it.


(Ryan) History: Little bit about Eric. Eric was born in the Shandong Province in China, he attended University there. But he would take 10 hour train rides to go see his girlfriend, so while he was there he had an idea to build video software so he could communicate with her easier (this was in 1987). After graduating from University, Eric parlayed his expertise in video software to a job at Webex in SanFran (one of the first 20 employees). Webex was eventually acquired by Cisco, where Eric worked his way up.


In 2011, Eric was the corporate VP at Cisco Webex and apparently pitched the idea of a smartphone-friendly video conferencing system but the idea was rejected. Shortly after, Eric decided to leave and start Zoom which was originally named Saasbee. He took 40 engineers with him. And a year later after launching their first beta which was able to host 15 oparticipants, Zoom signed their first customer (Stanford) and raised a $6 million series A, but no notable VC firms involved. 7 years later they IPO’d and in 2020 covid hit, which was obviously quite the catalyst for them.


(Brett) Industry/Landscape/Competition:

  • The video meetings/conferencing market was estimated to be $5.8 billion in 2020 and is expected to double by 2028 (who knows for sure though)

  • Competitors: Microsoft Teams, Webex, Google Meet. With the ancillary products they are competing with a lot of other companies like Five9 and Vimeo

(Ian) Management and Ownership:

  • Eric Yuan is the CEO

  • Technical background

  • I remember a couple years ago that he was fixing problems in the code from issues brought up on Twitter

  • He still owns 7.5% of the company, but that number has been decreasing

  • It still makes him the largest shareholder

  • He said a few months back that he was experiencing Zoom fatigue himself, more recently he’s come back and suggested that they are turning Zoom into the communications platform of a hybrid office future

  • He was born and raised in China and has a pretty impressive story

  • There are concerns from some people that Zoom might be too connected to the Chinese government, it suspended some accounts of chinese activists, Five9 merger didn’t go through in part because of China concerns


(Brett) Valuation:

  • Market cap of $36.6 billion, ticker ZM

  • Enterprise value of $31.2 billion (explain)

  • EV/FCF of exactly 20 right now (explain)

  • Share count went from 270 mil to 300 mil from the start of the pandemic

  • Just announced $1 billion buyback program (explain)

  • Granting pace isn’t that bad but they still have a lot of options/RSUs outstanding. Will be a tug of war between that and buybacks


(Ryan) Earnings:

  • At the end of the most recent Q, Zoom had ~510k customers with more than 10 employees. Up 9% YoY

  • However, customers spending more than $100k in revenue jumped 66% YoY. So 50% of their revenue is coming from enterprise customers vs 44% a year ago.

  • For FY 2022, Zoom had $4.1B in revenue. Up 55% YoY.

  • But they’re guiding for rev growth of about 11% next year

  • Then if you exclude a litigation settlement, they had about 38% FCF margins

2 other important numbers.

  • Ended the year with 191k enterprise customers. Up 35% YoY

  • Net dollar expansion rate among enterprise customers was 130%


(Ian) Balance sheet and liquidity:

  • About $5.4B in cash

  • No debt except for about $100mm in leases


Anecdotal Evidence:

  • (Ryan) No complaints. I use it every day. I think I probably take its ease of use for granted. It’s a wonderful product.

  • (Brett) Good product. Hard to see why we’d switch. Once the “free” university account expires we’ll likely pay for a standard subscription.

  • (Ian) Ran across it registering for classes remotely before college. Great


Future growth opportunities:

  • (Ryan) Zoom contact center. Like I mentioned earlier, this is their omni-channel solution for businesses to use as their basically customer support line and it’s optimized around video which is pretty rare. Upon a quick google search, it costs about $70 per agent per month, so quite expensive. On the last CC, they said they plan to keep investing here. And it seems like there is a lot they can do with that product. Eric said thus product was basically born out of customer feedback.

  • (Brett) Zoom Phone. Added 550k paid seats last quarter and is building momentum. Part of the cross-sell into existing enterprise accounts. It is an enterprise phone system, not quick sure what that means since I’ve never been in that environment but seems like most of those systems stink and could be an easy upsell.

  • (Ian) Zoom apps: Docusign recently added. This is their way to make the platform stickier. Someone from my school sold one of his apps to zoom and they’re integrating it into the main experience.


Highlights and lowlights:

  • (Ryan) Highlights: I think this is one of those companies that people just don’t want to switch off of. It’s a replicable product, but switching would be a pain. I also think Eric Yuan has done a wonderful job. Plus I like that they have the buyback in place. Lowlights: I think they’ve hit market saturation at least in North America. I wouldn’t expect a big chunk of their growth to come from net new customers.

  • (Brett) Highlights: Great unit economics, switching costs, increasing R&D spend, and seems like it will be an easy cross-sell with these other products to drive net retention growth. Lowlights: Have to thread the needle with the free/paid DIY accounts and educational accounts, ties to China (although I think that is overblown), and uncertainty about how prevalent video meetings will be in the future. I don’t know if we are biased because it is so key for us with the podcast. I don’t think competition is a lowlight.

  • (Ian) Highlights: Best product in market w/ a necessary product. Capitalized on good luck. Focus on profitability. Lowlights: Stiff competition, what platform will have the network effects. Five9 acquisition falling through.


Bull case:

  • (Ryan) At this point, I think the bulk of their growth is going to come from existing customers. So growing their DBNR by 10%+ a year. Whether that’s through additional seats, price increases, or additional products. If they can do that and maintain their current cash flow margins, this will be a good investment.

  • (Brett) Ancillary products + enterprise + international drives 10%+ growth. At this valuation that’s all you need as long as margins stay stable.

  • (Ian) People need video conferencing. 10% a year FCF growth.


Bear case:

  • (Ryan) Zoom spends a lot on R&D for new products, but doesn’t get enough adoption of those. That would lead to limited top line growth with decreasing margins.

  • (Brett) Besides the obvious ones that everyone thinks of, margin pressure feels like where this could go wrong. Were they over earning the last few quarters and will that fall off? If so that could spell trouble.

  • (Ian) It becomes a commodity. Prices head toward zero, and they are unable.




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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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