Zoom Proves Big Tech Doesn't Dominate

Jon Markman

Zoom Video Communications ((ZM) -Get Report), an upstart videoconferencing platform, is the biggest story in tech, a modern day David in a world of Goliaths. So much for the idea that Big Tech is stifling the competition.

To suggest business at the San Jose, Calif.-based company is zooming is an understatement. The company reported Monday that revenue growth surged 355% year-over-year. That’s on top of growing 169% in the previous quarter.

It is one of those rare businesses. The Zoom user experience is so simple and so clean that almost anyone can pick it up and broadcast themselves to their friends, coworkers or grandchildren in minutes. In the work from home era, videoconferencing is an essential tool. With Zoom, it just works. That’s a good thing.

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

Most iPhone users, for example, are using Zoom instead of the perfectly good video conferencing software built into their devices. It’s called FaceTime. But FaceTime usage is not booming … Zoom is.

Kelly Steckelberg, chief financial officer, said Monday that new customers were responsible for 81% of revenue growth during the quarter, contributing to $186 million in profits, up from only $5.5 million a year ago.

Zoom disrupted video calling on iPhones because the experience is cleaner and it’s easier to hook up with friends or coworkers who don’t have iPhones. In June, the company set out a strategy to take on its bigger rivals embedded in corporate America.

The company enlisted device makers DTEN, Neat, Poly and Yealink to build hardware around Zoom’s popular software, according to a report from ZD Net. It’s was a direct attack on the larger video conferencing market dominated by platforms like Cisco Systems ((CSCO) -Get Report) and Google ((GOOGL) -Get Report).

The new hardware is being offered as a service. For $6 to $200 monthly, business subscribers get full access to Zoom’s software, housed in either a dedicated phone or meeting room hardware.

The strategy fits neatly with the larger business model to land and expand in corporate board rooms globally.

A June 2 press release revealed 279 enterprise customers with billings of greater than $100,000 per year. Steckelberg noted Monday that enterprises generating in excess of $100,000 has reached 988. And those customers, on average, are spending much more. Annual recurring revenue is up 130% from a year ago.

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. During 2019, total sales of videoconferencing gear reached $6.1 billion.

Zoom managers believe they can grab a third of that market.

Shares trade at 205x forward earnings and 108x sales. The stock has risen 377% in 2020 alone.

Those nosebleed levels reflect investor optimism the heady growth will continue. Adding hardware partners, and new corporate customers at a breakneck pace is a good step in that direction.

The oddity is that tech pundits say such growth is impossible in a world dominated by large platforms like Microsoft, Google and Cisco. They are clearly wrong.

The growth of Zoom should be a wakeup call for investors. Open networks and digital transformation level the playing field for innovative companies. Opportunity is everywhere.

Buy Zoom into pullbacks.


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Comments (1)
No. 1-1

Awesome article Jon! Interesting to highlight that zoom capitalizes on all mobile users, where FaceTime can’t compete. Hoping zoom will take some of that market share!