Zoom is the IPO to Watch, Not Lyft
Lately, the financial media has been talking a big game about the Silicon Valley Unicorns finally going public. Uber and Lyft have dominated the conversation the past month, with a little bit of Pinterest and Slack sprinkled in for good measure.
From the outside looking in, it seems like these companies are garnering a lot more attention than usual, and could possibly be the most anticipated public offerings since Facebook‘s in 2012. The problem is, most of these tech companies look like bad investments, especially Uber and Lyft.
We’ve already seen Lyft’s terrible balance sheet, and I doubt Uber’s is much better. I still shudder at the fact their going to get a 10x-plus revenue multiple when they are losing $900 million a year on $2.2 billion in sales.
Here is what tech guru (a term I hate but truly mean in this case) Scott Galloway had to say about Lyft’s potential:
Prediction: Lyft up big within 12 minutes of open. Stock down big within 12 months. Tech firms that sustain this multiple (of revs) are monopolies with network effect(s). Lyft is/has neither. #snap — Scott Galloway (@profgalloway) March 29, 2019
If Uber, Lyft, or Pinterest don’t get your juices flowing, don’t worry, there may just be a tech company for you. It is going public this Spring, is actually profitable, and doesn’t have a nightmare-inducing balance sheet. I’m talking about Zoom, the video communications company.
What’s so Great About Zoom?
Zoom is a video communications platform, built on the cloud, and heavily used for business communication. According to the S-1, the company’s mission is to reduce friction in video communications. If unfamiliar, here is the company describing the basis of how the product works:
“The cornerstone of our platform is Zoom Meetings, around which we provide a full suite of products and features designed to give users a frictionless communications experience. Users are comprised of both hosts who organize video meetings and the individual attendees who participate in those video meetings.”
So, in other words, Zoom has actually built video communication software that works. I’ve had no personal experience with the product, but I guarantee corporations rejoice when the first 20 minutes of every meeting isn’t spent troubleshooting connections.
And that is why, before even looking at the financials (which are phenomenal btw), Zoom scored a point in my book as a potential investment. They easily solve a widespread problem and save businesses time, providing true value for their customers.
Now, to Those Juicy Margins
Simple put, Zoom’s financials were outstanding. Maybe everyone was just glad to see a tech company not burning cash like a California wildfire, but it looks like they have an extremely profitable business on their hands.
Here are some of the key numbers from the S-1:
Sales of $60, $150, and $330 million in 2017, 2018, and 2019, respectively. That is 100% revenue growth over the last two years.
Gross profit of $269 million in 2019 (their last full fiscal year), giving them a gross margin of 81.5%.
Net income of $7.5 million in FY 2019.
Only $9 million in stock-based compensation in 2019, a lot lower than most tech firms.
Another crazy number is how much they are spending on Sales and Marketing. In 2019 Zoom spent $185.8 million on marketing, which is a whopping 56% of their revenue. Eventually, they will be able to scale back marketing spend as a percentage of revenue, giving them an easy way to generate more profits.
As for the public valuation, that’s anyone’s guess, but gun to my head I’d say they get at least a 15x revenue multiple, possibly 20. That would put them on par with MongoDB and Twilio, two B2B SaaS companies growing sales in the high double-digits, just like Zoom. They honestly belong in our Digital B2B Stock Basket, and will probably be heavily considered for an addition next quarter.
I’m not an IPO investor, so I don’t think I will be buying Zoom stock until late 2019 at the earliest. However, if they can keep up this torrid top and bottom-line growth, I will definitely consider buying shares, especially if the price drops under 15 times sales.
Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.