With the current inflationary economical climate, Cathie wood’s insane bet on the early stage & poor cash flow companies seemed insane to almost everyone. In this blog post, we are going to look at Zoom one of Ark invest biggest holdings in 2022.
Why did Cathie invest in zoom?
On September 4 2021, Cathie did an interview with Brian Sozzi on yahoo finance. In that interview, she highlighted that:
- Zoom is more than a video conferencing technology company.
- With “Zoom Phone”, Zoom is going to take over the PBX system, used by enterprise communication. “Zoom Phone” has a chance of us capturing and dominating the $1.5 trillion enterprise communication market in the years ahead.
- It is not just about video, work from home, or the hybrid market.
- Zoom is spreading its business ventures into the “Communication equipment realm”, which is the largest part of the tech stack market.
- The 2020 pandemic is proof that Zoom is a superior product to some of the legacy players.
On September 30 2021, Ark invest realise this piece on Zoom. The premise of the article is:
- There is a clear shift towards WFH for knowledge workers.
- Unified Communications(UC) platforms are needed to ensure the ubiquity of two-way communication channels.
- Ark thinks Firms will search for vendors guaranteeing the highest quality video conferencing and cloud-based telephone solutions
- Zoom acquire Five9, a leading cloud contact center provider, suggests that it aims to streamline more customer-facing interactions.
Zoom performance review after Covid.
Zoom experienced signification double-digit growth from Q1-2019 to Q3-2021. Since then, growth has slowed down significantly for both Customer acquisition and revenue front.
Revenue from Enterprise and Online customers are split rather evenly.
TTM Net $ Expansion Rate for Enterprise Customers measures zoom’s ability to upsell its services to their existing enterprise customers. Currently, their Expansion Rate Remains at a healthy 130%. As long as this figure remains more than 100%, it indicates existing enterprise customers are buying more products/services from Zoom.
In their 2022 annual report, Zoom has highlighted that,
- their competition has a significant advantage in terms of financial, goodwill, and product bundle to offer for their customers.
- Price-sensitive business
- Moving forward to capture the enterprise market, they expect to see a higher cost of sale with no guaranteed results. This is because of complications in chasing big enterprise customers.
Cathie wood’s bullish view on Zoom is based on Zoom Phone’s PBX system. Zoom Phone was introduced back in 2019. Zoom phone is a core part of their UCaaS strategy. If this strategy is successful, it would be reflected in the “TTM Net $ Expansion Rate”.
Zoom Free cash flow remains strong, and they have a current(Q1 2023) Operating Margin of 17.4%.
Zoom growth has been slowing down quite rapidly. With “TTM Net $ Expansion Rate”, above 130%, I can assume that the Zone Phone UCaaS strategy has been bearing fruit. My biggest concern is the competing companies ramping up their Unified Communication technologies and offering them as bundles with their existing enterprise solutions. Zoom has the potential to dominate the UCaaS market. However, it’s a long shot.