(Veteran tech columnist Jon Markman publishes Strategic Advantage, a guide to investing in the great digital transformation of business and society. Click here for a two-week trial.)
It’s been a tough slog lately for Zoom shareholders. The company is under scrutiny for interactions with foreign governments and sentiment surrounding the business has turned decidedly bearish.
The share price weakness presents a buying opportunity.
Zoom is still the biggest story 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.
It’s simple videoconferencing application was the perfect product for a pandemic. With so many people working from home the software caught on quickly. The Zoom user experience was so intuitive that almost anyone could pick it up and broadcast themselves within minutes to co-workers, classmates, family and friends. And it was platform agnostic. There was no need for an iPhone or a Windows computer running Office. I
Too many tech companies get this wrong. In their zeal to lock-in customers, product managers often forget the appeal of simplicity and openness.
Zoom’s rise in popularity was breath-taking. Zoom became a verb replacing “teleconference” as the mobile application set records for downloads on iPhones and Androids. The share price zoomed, too, rising eightfold from $72 in January to $588 through the middle of October. Then sentiment began to fade.
I wrote at the time – click here to view -- that the next several months were going to very tough for Zoom shareholders. I advised taking profits.
My reasoning was simple. For the company to get to the next stage in its growth cycle managers needed to begin doing all of the things they had resisted. They needed to build a real platform. They needed to lock-in customers like other large tech businesses.
Zoom product managers began down this track in October. At Zoomtopia, an annual conference for Zoom channel partners, they revealed OnZoom, an events platform and Zapps, an application marketplace.
The big idea is to give businesses and non-profits a platform to offer virtual events and accept payments for gatherings between 100 - 1,000 patrons. It might be a perfect venue for virtual concerts, technology and charitable conferences.
Zapps is its version of Apple App Store. With 35 launch partners, including Box (BOX), Dropbox ( (DBX) - Get Report), Slack (WORK), Salesforce ( (CRM) - Get Report) and ServiceNow ( (NOW) - Get Report), Zapps should be able to gain traction quite quickly.
Unfortunately, the platforming of Zoom invited comparisons to other enterprise software ecosystems. Zoom might be easier to use than competing products from Microsoft ( (MSFT) - Get Report) and Cisco Systems ( (CSCO) - Get Report) but those companies have longer histories with enterprise customers. They have also been through the wringer with government regulators and political scruntiny.
A Zoom corporate blog post revealed Friday that U.S. Attorney’s offices in New York and California filed subpoenas in June and July seeking information about foreign influence. The implication is Zoom may have a China issue.
Previously politicians asked Eric Yuan, Zoom’s Chinese-born founder, to pick a side in the escalating war of words between China and the United States.
I wrote in October, when Zoom shares were trading at $580, that investors should close long positions and get ready to buy again on a decline to $360. Wednesday morning the stock traded back to $378.60.
Zoom is clearly a different business from the upstart that won over work-from-home users in March. That market is maturing. However, it is a real business with a great product customers love. There is also the potential to be a legitimate hub for new applications.
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 shares trade at 139x forward earnings and 59x sales. Those metrics reflect the size of the total addressable market and investor optimism that Zoom will be a major player. That’s a good bet.
Investors should get ready to buy Zoom shares in the $360 range. Shares could easily bound back into the $500 range within 12 months.