Zoom Stock: Likely Overvalued As Microsoft Teams Dominates – Seeking Alpha

Zoom Stock: Likely Overvalued As Microsoft Teams Dominates – Seeking Alpha

Zoom Stock: Likely Overvalued As Microsoft Teams Dominates – Seeking Alpha 0 0 Alan Dickson
Communication support, call center and customer service help desk. telephone devices with VOIP headset in office.Customer service support (call center) concept.

Kunakorn Rassadornyindee/iStock via Getty Images

Kunakorn Rassadornyindee/iStock via Getty Images
The analysis from other contributors regarding Zoom (NASDAQ:NASDAQ:ZM) has mostly been from the financial perspective. But the financial perspective doesn’t always tell how the business is directed, especially when the industry is fast paced, as it is backward rather than forward looking.
In Zoom’s case, it appears to be that Microsoft (MSFT) has the dominant advantage and Zoom’s chances of further grow are slim. Maybe in a better economic environment it could be acquired by an aspiring competitor, but on a standalone basis it appears it will likely be headed for difficult times. I support this assertion with the following observations:
I want to make it extra clear that I am not being negative about the Zoom product or company. I used it and was quite fascinated with how well it worked at the start of the Coronavirus pandemic. While we all love to root for the little guy, however, in this case, the economics are heavily stacked against it and it is likely Microsoft will dominate this niche.
The above is just user experience and observations. Next let’s see how the numbers stack up.
Flatlined revenues over 5 quarters: Zoom’s revenues have flatlined in the past 5 quarters as shown below. Now I can give a growth stock (priced at 6X sales) the benefit of doubt if it’s had a rough quarter or two. But this is 5 consecutive quarters! GAAP operating income has plummeted in those 5 quarters, though Non-GAAP operating income is only slightly down (difference between GAAP and non-GAAP is mainly due to higher share based payment costs).
Zoom Quarterly revenue, GAAP and non-GAAP operating income

Zoom quarterly revenue, GAAP and nonGAAP income

Zoom quarterly revenue, GAAP and nonGAAP income (zoom investor presentation)

Zoom quarterly revenue, GAAP and nonGAAP income (zoom investor presentation)
Source: Zoom investor presentation
Note that Zoom has a January year-end, so Q2 FY23 ended in July-22 and Q4-FY22 ended in Jan-22.
So how has Zoom’s nemesis fared in the same period? We can’t really see revenue but we can compare user numbers. Though Microsoft Team’s monthly active users is not an apples to apples comparison with Zoom’s customers > 10 employees, it’s the only metric we have, and it’s probably indicative enough of the overall trend. Since Sep-20 Microsoft Teams’ metric has grown faster than Zoom, especially during 2021, where Microsoft almost doubled its users from Mar-21 to Dec-21 while Zoom flatlined during that entire period.
Users comparison
Microsoft Teams
Q1-FY21
(Sep-20)
Q3-FY21
(Mar-21)
Q4-FY21 (Jun-21)
Q2-FY22 (Dec-21)
monthly active users
115 million
145 million
250 million
270 million
Not further disclosed
Growth rate (%)
n/a
26%
72%
8%
Zoom
Q3-FY21
(Oct-20)
Q1-FY22 (Apr-21)
Q2-FY22 (Jul-21)
Q4-FY22 (Jan-22)
Q1-FY23
Q2-FY23
Customers > 10 employees
433,700
497,000
504,900
509,800
502,400
492,500
Growth rate (%)
n/a
15%
1.5%
1%
-1.5%
-2%
Source: Author, with data from Zoom investor presentations and Microsoft earnings calls
Non-enterprise revenue declined 10% YoY: Zoom’s revenue is growing increasingly reliant on enterprise revenue, as total revenues increased by 8% and enterprise revenues increased by 27%, which works out actually a YoY decline for non-enterprise revenues from $548m to $500m – almost a 10% YoY decline! This means Zoom is getting more reliant on enterprise customers but as we see above, this will be facing very stiff competition from Microsoft Teams.

Zoom quarterly revenue

Zoom quarterly revenue (zoom investor presentation)

zoom quarterly enterprise revenue

zoom quarterly enterprise revenue (zoom investor presentation)

Zoom quarterly revenue (zoom investor presentation)
zoom quarterly enterprise revenue (zoom investor presentation)
Furthermore, showing YoY figures allows Management to present a higher growth rate. Shown in the back of Zoom’s investor presentation slides are the quarterly revenue/customers etc, and we can see that customer growth by any dimension has been stagnant for several quarters. The “Customers>$100K TTM revenue” indicator keeps increasing, but it appears that would be due more to the full-year effect of previous customers signed on, rather than new customer growth.

Zoom quarterly detailed figures

Zoom quarterly detailed figures (Zoom investor presentation)

Zoom quarterly detailed figures (Zoom investor presentation)
Limited unrealized revenue in contracts: Though Zoom states it locks in revenue via multi year contracts, it appears there isn’t that much gas left in the tank – there is only $3.2 billion revenue under contract which is less than a year’s worth of revenue.

zoom unrealized revenue under contract

zoom unrealized revenue under contract (zoom investor presentation)

zoom unrealized revenue under contract (zoom investor presentation)
Since Zoom states many of these contracts are multi year, so contracts signed won’t roll off immediately, so it’s going to take some time for the stagnation to show in terms of negative QoQ revenues. Once they start to materially decline, then expectations will cascade negatively unless some company looking to enter the arena does a buyout. But a company entering the arena would face the same daunting challenges and would not pickup many customers even if they bought Zoom for $25 billion (3,000 paying customers above $100,000 revenue) it might make more sense for that company to build up the product and user base from scratch.
If Zoom’s core business is stagnating and Microsoft is dominant, these may not be competitive enough to support a P/S of 6. Now to be fair, Zoom has fallen 85% from its peak, there is a possibility that Zoom somehow survives and thrives:
To sum up, I fear that the industry economics weigh against Zoom and unless Management is able to pull a rabbit out of the hat, it is probably not going to recover and may very well face even more hardship ahead, if so, the current P/S of 6 may still be richly valued despite already falling c.85% from highs. Ultimately, meetings are just another tool and faced with quality parity and corporate politics, it seems more likely enterprise users will choose Microsoft.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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