JUNE 25, 2020
Link to the Real. It Pays.
growth charts end in flagpoles there’s serious correction in the wind. Right, usually. Zoom’s not flag-poling. It’s, well, Zooming. When share prices nearly triple in six months that’s too far too fast. Maybe. Yet ZM’s has–275%. Healthy sustainable growth takes a breath once in a while yo. Zoom’s doing that. Healthy growth resembles a staircase; rise and rest. Again, San Jose-based Zoom’s got that. So what’s the danger? Is there one? What’s an investor to do when ZM’s shares are “Zooming Now. Nothing Standing in the Way.”
the stock world at least, it seems Zoom alone provides video conferencing. How many have heard of Google’s Meet, Hangouts, or Duo? What about others such as GoToMeeting, Webex, Blue Jeans, Teams, Jitsi Meet, Signal, Discord, HouseParty, and of course, Messenger & WhatsApp, Skype, FaceTime? Many of these are indeed familiar yet mostly go unmentioned as of late.
Zoom owns all the air. How? Zoom owns all the air by nearly tripling its’ share price this year. We didn’t really realize that Google offers three video products. “Meet” is a business level conferencing app, a built-in feature of G Suite. “Duo” is Google’s simple video call app, while “Hangouts” accommodates larger groups, with no time limits, and also offers text and phone calls. Do you hear anything about these now? Do you hear “Buy Alphabet based on video conferencing?” Nah. We did however hear the DOJ reiterate its’ intention to cavity-search Alphabet for anti-trust violations.
What about Zoom? Is Zoom a good stock? Last month a fuss arose concerning metrics, company information, potentially misleading company information. ZM CEO Eric Yuan stated in his blog that Zoom now had “300 million users.” Nice. Not really. It wasn’t true and the CEO was forced to clarity “300 million conference participants.” But that wan’t the real “misleading” bit. That bomb came to light after the advent of “Zoombombing.”
The “zoombombing” fugly brought to light the falsehood of ZM’s high-profile claims of security in the form of “end-to-end” encryption. Well, in marched the attorneys and out popped the headlines about new class action lawsuits. Big Trouble? Not really. Lawsuits almost never stop or even truly slow sizable companies. If they did America wouldn’t have any, sizable, companies. JNJ has been facing over 100,000 suits on three fronts and they march on, albeit underwater YTD.
Additionally, the hacking events themselves were bad, exposing scads of conference participants to horrid and hateful comments and images. Not good, yet what happened? After that we got a company press release stating that the company would “forego any further feature development to focus on security.” And the share price? It shrugged off the fugly like “Oops–gotta go.”
the right product at the right time is good. Think water in the desert. Having built that product specifically from the start to do what it does, can makes it superior. People like superior, and that’s yet another reason Zoom’s working. And with whom are they primarily competing? Until now we didn’t even realize that Microsoft or Cisco did video conferencing. Yet they are Zoom’s largest competitors. Are you hearing about their conferencing products just now? Right, neither are we.
On June 2nd ZM reported their Q1, 2021 results. A Market Watch piece touted results as perhaps the best for any company, ever. Revenue growth was 169%Y/Y. Who does that? Amazon used to.
Q1 total revenue was $328.2M, up 169%Y/Y. While many companies drop guidance statements, Zoom didn’t. Revenue for Q2 is expected to be between $490-$500 million. If they hit the $490 mark it would mean a Q/Q revenue growth rate of 49.4%. Full fiscal year 2021 revenue is set at $1.775 to $1.800 billion. Non-GAAP diluted EPS is estimated at $1.21 to $1.29 a share. CFRA measures that at the high end.
Many attribute the stock market with “animal spirits.” Why? The market behaves very differently. It’s slow or fast, calm or frantic, “irrationally exuberant”–Greenspan, summer sideways and sleepy, steadily growing, “grinding” higher, bull-rushing higher, cascading down, or simply crashing–1987, 2000, 2008. Why go through this? Because stocks thrive or dive in large part based on the “sentiment” and state of the wider market, and sector. What’s that look like now for ZM?
-Zoom Video Communications Inc-
months Zoom’s been the target of fast, aggressive, even reckless money, much of it new. It’s up 275%YTD, and 56.4% in the past twenty days.. How’s that sustainable? It’s not, and when it stops it will end sharply. It’s “conference participants” have soared 10X, and it’s sales more than doubled, both YTD. It’s chart is a picture of perfection as is it’s business outlook. Nothing stands in its’ way, as a business. Yet bedrock stock history says that’s “too far too fast.”
chase growth everyday and will go wherever it is to participate, even to the bankruptcy line–think Hertz. ZM’s the highest-profile example of the “rush to growth” now. Investors often ride growth until it crashes, and ultra-fast growth crashes without warning, and often fugly. The chances of this happening to Zoom are high.
We’ve seen many tech stocks rack up years worth of growth in weeks. Zoom’s product and positioning are perfect for the times. New spikes in COVID show the trouble’s far from over, thus ZM’s catalyst rolls on. If you want shares, wait for the pull-back the 9-day RSI pattern clearly predicts. We are. We’re leaning toward a chunk ourselves. Look for something close to a double-digit drop and set a trailing stop of 2%. If you’re kicked out on a shallow drop, you can get back in. But you don’t want to ride this down.
Rapid growth is created in only two ways; rotations and new money. Zm now lives mostly on new money. That stuff isn’t endless. Some say, including Cramer, that foreign money and new retail investors are driving the stellar gains we’re witnessing now. Neither sports a good track record of picking winners, or selling wisely.
Is Zoom a good buy? What’s the danger? Zoom is now being fueled by the new and the naive. Again, still soaring after a 275%YTD run. We see a bright mid-term future, but not a current fundamental structure beneath to justify that. Zoom earned nine cents a share last year. As always, good luck and good investing.
Zoom Video Q1, 2021