Zoom Video Communications (NASDAQ:ZM) obliterated all expectations again during the worst of the economic lockdown brought on by the coronavirus pandemic, and shares are now up 600% so far in 2020 as of this writing. It’s easy to be drawn in by the incredible financial figures the video conferencing company is posting, but the implications of Zoom’s rise go far deeper than a great (and incredibly fast) growth story. Because of its meteoric rise, the business world will never be the same again.
Incredible revenue growth for Zoom
In its second-quarter fiscal 2021 earnings report, Zoom posted a 355% increase in revenue to $664 million ($146 million a year ago). Free cash flow (revenue less cash operating and capital expenses, and what gets added to or subtracted from the balance sheet) once again blew up as it did during the first quarter, as a number of annual subscription payments were made and Zoom seemingly ran out of places to spend money amid the pandemic. Free cash flow was $373 million compared to $17.1 million last year and was $706 million over the last 12-month stretch.
Eventually, Zoom’s growth rates (and free cash flow profit margin, which was 52% over the last 12-month stretch) will normalize, but for now, the cloud software firm is padding its lead in a suddenly essential service sector in a big way. Cash, equivalents, and marketable investments on the balance sheet at the end of July were $1.48 billion with zero debt — compared to just $855 million in liquidity at the start of the fiscal year.
For what it’s worth, Zoom now trades for over 53 times expected full-fiscal year sales (guidance for which was increased to $2.38 billion at the midpoint, up from $1.775 billion to $1.8 billion before, and good for a 282% year-over-year increase if the midpoint of guidance is realized). It’s an incredible premium on a stock that has been defying expectations for years, capped by an unimaginable year that is creating massive demand for web-based video conferencing tools. I can’t tell you to stay away (I have a small position in Zoom), as shares seem to have a mind of their own bent on running higher — but I will say to keep your bet small if you do decide to buy (or buy more). If it keeps up its recent pace, you won’t need a massive position for it to make a difference in your portfolio.
Incredible cost savings for everyone else
Zoom’s relentless run higher aside, there are greater implications here for the business world and economy at large. As I’ve been arguing since the onset of this crisis, the response to combat COVID-19 has set off a “redundancy crisis.” With the digital economy coming of age, old operating standards have become unnecessary; many companies just needed a catalyst to force the change. One area that Zoom specifically has exposed as redundant: Needless commuting and business travel.
Interpersonal interaction is an absolute must in any organization, but it’s looking increasingly likely that pre-pandemic time spent in cars and public transit was excessive. The same goes for trips between cities, often booked with airlines and gobbling up billions of dollars in corporate budgets each year — not to mention money spent on room accommodations and dining. With the advent of Zoom, many of those face-to-face meetings can now take place via the web. I expect business travel will eventually rebound, but it may be a very long time before it recaptures the level it was at before 2020.
Just one case in point is Delta (NYSE:DAL), which hauled in $42.3 billion in passenger ticket revenue in 2019. Of that total, $15.0 billion of it was for business cabin and premium tickets. Thus, a full one-third of revenue — not including business travelers who opted for a modest coach cabin seat — was derived from the lucrative business travel industry, and that’s just a single airline operator.
Zoom is now winning at this industry’s expense. Total customers spending at least $100,000 a year increased 112% in the last quarter to 988, and customers with at least 10 employees grew 458% to over 370,000. As effects from COVID-19 ease over time, these figures could slow down or even reverse course. But given how much money is being saved using web video conferencing, I’m highly skeptical that it will revert to the way it was. Businesses, after all, exist to make money, and Zoom is helping many of them keep a great deal more than they were prior to the pandemic.
What does this imply for Zoom long-term? I have no idea. But given the substantial cost savings it is helping its customers realize and an ample and still growing balance sheet, I’m optimistic enough that I want to remain invested — albeit with a small position — in this highly disruptive virtual meeting software firm.