Zoom Enters Perilous New Growth Phase

Jon Markman

The global pandemic made Zoom Video Communications ((ZM) -Get Report) remarkable, and now the company is attempting to capitalize. Spoiler alert: Future growth is less assured.

The San Jose, Calif.-based company, Wednesday began Zoomtopia, a virtual showcase for a host of new integrated products. The videoconferencing phenomenon is becoming a platform.

This is why investors should be more careful.

Zoom is one of the biggest stories in the technology world. In early September the company reported revenue growth surged 355% year-over-year. Remarkably, that growth was on top of a 169% expansion in the previous quarter.

A simple, elegant videoconferencing application was the perfect product for a pandemic. Many of us are still working from home. Meeting virtually with coworkers, classmates, friends and family has become essential. And the Zoom user experience is so simple that almost anyone can pick it up and broadcast themselves in minutes. Zoom just works.

Too many tech companies get this wrong. In their zeal to lock in customers, product managers often forget the appeal of simplicity and openness.

The problem is that Zoom needs to lock in customers to get to the next phase of its growth cycle. To capture more of the videoconferencing marketplace, the company needs to be more than an app. The software needs to become a hub.

ZD Net reported in June that device makers DTEN, Neat, Poly and Yealink would begin embedding Zoom software in their videoconferencing hardware. The new equipment is a not-so-subtle shot at integrated video conferencing gear from Cisco Systems ((CSCO) -Get Report), the current market leader.

Microsoft ((MSFT) -Get Report) is also watching closely, according to ZD Net. Microsoft Teams software competes directly with Zoom for enterprise clients, and its hardware partner ecosystem includes Dell ((DELL) -Get Report), HP ((HPQ) -Get Report) and Lenovo.

Zoomtopia is the launchpad for two new products tied to the core Zoom experience.

OnZoom is an events platform and marketplace. The big idea is to give businesses and non-profits, small and large, a platform to offer virtual events and accept payments. The current product page is populated by smaller yoga and fitness instructors, but Zoom managers envision offerings from professional event organizers with 100 - 1,000 paying customers. For example, OnZoom might host virtual concerts, technology and charitable conferences.

To get ready, OnZoom will begin accepting payments through PayPal ((PYPL) -Get Report), major credit card vendors, and Pledgeling, for charitable donations.

Terrible branding aside, Zapps is exactly what it seems, a new Zoom Apps store business. In theory, integrated apps eliminate one of the more annoying parts of enterprise videoconferencing, constantly switching screens between the Zoom client, and apps running in the background.

With 35 launch partners, including Box ((BOX) -Get Report), Dropbox ((DBX) -Get Report), Slack ((WORK) -Get Report), Salesforce ((CRM) -Get Report) and ServiceNow ((NOW) -Get Report), Zapps should be robust out of the gate.

Events and apps built on top of Zoom software certainly has the look and feel of a platform. Earlier partnerships with hardware companies to embed Zoom help, too.

That was the gist of bullish note from Bernstein this morning. The investment researcher raised its price target for Zoom shares to $611, the highest level among analysts following the stock. Previously Bernstein analysts had their price target fixed at only $228.

It’s all good news, except the easy part of the Zoom growth story is over.

The global market for videoconferencing is expected to grow to $11.6 billion by 2027, according to a report from Transparency Market Research, a specialty IT research group.

Zoom is still a minor player and will face stiff competition going forward from Cisco, Microsoft, Alphabet ((GOOGL) -Get Report) and Amazon.com ((AMZN) -Get Report). All of these companies are fierce competitors with large ecosystems and the wherewithal to offer like services for free to maintain or build market share.

The other facet of the story is Zoom shares are no longer cheap, even given its heady growth.

The stock trades at 178x forward earnings and 104x sales. Shares have gained a whopping 650% in 2020, pushing the market capitalization to $140 billion.

I first recommended Zoom in March when shares were trading at $117. This morning the stock was near $538. I like the story but investors are too optimistic about the next phase of the business.

Growth investors should consider buying Zoom shares into a decline to $360. 

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