Zoom keeps zooming 🚀
Yet bears are grounded in theory
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It began the usual way, a complete mess.
Whenever I had a group video call, there was always some technical issue. Someone forgot to download the software, another person couldn’t hear, someone else was pixelated. Half the meeting would be lost solving these problems.
That was until I tried Zoom.
Using Zoom for the first time felt like pure bliss. In a world of clunky and unreliable video calling tools, Zoom ‘just worked.’ That’s all I needed. That’s all the world apparently needed too.
With its stock price almost quadrupling this year, the market is bullish about Zoom.
The bull case
Bulls love Zoom for three reasons:
Product is much better than competition
Slick sales flow
Record shattering financial performance
Product
Video conferencing software is littered with options. We’ve tried them all: Citrix, Webex, Google Meet, etc.
Despite being the new kid, Zoom has risen above. How? They use the same playbook as Slack: focusing on building great product. Competitors played the traditional game of building a sales army at the same time.
Focus helped Zoom solve the technical challenges that stump the competition. Zoom users are able to easily join calls and enjoy them with much higher transmission quality.
This made Zoom a no brainer to use.
Sales flow
Zoom lets their great product sell itself. Ben Thompson summarized it as:
User encounters Zoom, is impressed
User tries out Zoom’s free host plan (which is limited to 40 minutes)
User becomes a paying Zoom customer with nothing more than a credit card
User evangelizes Zoom to their team and company
Zoom leverages its sales team to become the video conferencing system (and now phone system) of choice for the entire organization
What a flex! Zoom noted in its S-1 that over half of their large enterprise customers went through this flow.
Financial performance
Going viral with a lower overhead cost structure allows Zoom to crush it on all financial dimensions. When they went public in April 2019, venture capitalist Alex Clayton wrote,
“From looking at Zoom’s meteoric rise compared to other companies, they’re in a class of their own. Every metric they disclose is best-in-class — revenue growth, sales efficiency, profitability, net dollar expansion, massive growth in $100K+ revenue / enterprise deals.”
That’s stayed true since. Zoom was one of the biggest winners of the pandemic. These recent numbers don’t lie:
The bear case
The Zoom bear case is rooted more in theory than the Slack bear case. Bears argue:
Stock price is too high
Brand is weakening
No strong moats exist
Stock price
Growth stocks are tricky to value.
That said, bears believe Zoom is overvalued compared to other industry players. For example, Zoom’s Price to Sales ratio (P/S) is 83. The P/S for Slack is 20. In 2011, Microsoft purchased Skype at a P/S of 10.
Brand
It’s mo’ users mo’ problems for Zoom. In the last 6 months, Zoom has been caught doing shady things:
Running a secret web server on users computers
In each instance, Zoom was sloppy, yet also quickly fixed their mistakes. As Zoom thrusts further into the spotlight, bears are concerned more mistakes will surface and hurt the Zoom brand.
Moat
Talking about Zoom’s moat is becoming a trope on twitter
Finally, while Zoom is raking in the money now, will they be able to keep it up? A way to preserve profits is to have an economic moat.
Bears (and I) struggle to find a strong moat for Zoom. Network effects? No. Economies of scale? Not really. Intellectual Property? Potentially. Brand? Not for bears.
My friend Turner proposed this question last week. Despite 170+ responses, I couldn't find a single strong answer.
Your point of view
Bulls are backed up by a best in class product and financial performance. It has top Venture Capitalist Bill Gurley drooling.
Bears are grounded in textbook theory. Potential weaknesses lurk.
Where do you stand on Zoom - are you are a bull or a bear? If you want to share, reply to this with your position and top of mind reasoning. I’d love to hear from you.
Thanks for reading,
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Note: This content is for informational purposes only. It should not be relied upon as legal, business, investment, or tax advice. Your use of the information contained here is at your own risk.
Total Bear on Zoom - not only does Google Meet have it beat product-wise in almost every way, and now avail for non-GSuite users for free...but VR platforms like Teooh are coming to market which approximate real-life interactions much better.
Not only does Zoom not have a moat, it’s already losing market share and imo, will start hemorrhaging. Add another scandal or two...🤷🏼♀️
My take: (Building off of other takes namely from Hiten Shah and Gokul Rajaram)
Zoom was a band-aid solution to the rapid shift to remote life. Companies are now looking for video software that fits their unique problems, not a gatekeeping video chat service like Zoom. Companies like $API and Daily.co will likely take considerable market share.
COVID has been an incredible experiment in watching how an entire global workforce can adapt to remote work. For the most part, it was relatively easy. Educators were able to host classes over video, fitness instructors could stream their yoga classes, etc. However, there’s a lot of talk about the leading video conference providers not actually having a product-market fit. As you mentioned, Zoom gained notoriety for simply working, which is a pretty low bar to pass. It's not a moat by any means. Just working isn’t what much of their customer base needs at this point.
Now that the dust has settled, I expect enterprise customers to look for more elegant conferencing solutions that cater to their needs without the Zoom app's approval being needed to customize features.