Opinion: Zoom’s pandemic boom cools — but the company is building a powerful platform to battle Microsoft and Cisco

Opinion: Zoom’s pandemic boom cools — but the company is building a powerful platform to battle Microsoft and Cisco

It’s hard to understand a stock selloff that comes after an earnings report in which a company outperformed every significant analyst expectation and said it would largely meet those expectations once again in the next quarter. 

For this pandemic-fueled rocket ship that saw a wave of 300%-plus revenue growth quarters, a measly 54% increase and the first billion-dollar quarter in the three months through July was met with a flock of unsettled investors racing for the door. The San Jose, Calif.-based company forecast even slower revenue growth for the three months through October.

As a market, we like to talk about the new normal that will exist as the pandemic subsides. Well, perhaps as investors, we need to be talking about a new normal for companies like Zoom that exploded during the onset of the pandemic only to continue growing at a more-than-respectable clip thereafter. 

In short, Zoom isn’t the problem. The unrealistic expectations that triple-figure percent growth is sustainable at this point is. The numbers for Zoom are in line, and the future for the company looks bright. With the post-earnings selloff of over 10% after the stock market closed Monday, which followed the 40% or so share-price drop from Zoom’s all-time high, this may be an opportune moment for investors to take another look at the fast growth collaboration company. 

Bullish and bearish views

Let’s look at two reasons investors should remain bullish about Zoom and one caution flag that the company will have to address in the coming quarters.

Zoom’s parabolic growth stemmed from the pandemic, but it was also based on its ease of use. Of all the collaboration platforms, it is hard to argue that any made it easier to sign up and use their platform than Zoom. Many would say that, even today, that is still the case. Despite early security woes, the company hasn’t only maintained a stickiness but has expanded rapidly. The continued growth at this point is a reflection of sound execution, a good product and secular demand that will be based on work remaining hybrid, even when the full-on remote-work era subsides. 

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The numbers to watch are paid customers, those converted to paid customers and, perhaps most importantly, the expansion of large paying customers, which Zoom defines as those spending over $100,000 in the trailing 12 months. In the most recent quarter, the company executed well across all of those fronts.

Total paying customers in companies of more than 10 employees jumped 36% to 504,900. Net dollar expansion of customers with more than 10 employees was above 130% year-over-year for the 13th straight quarter. Customers spending over $100,000 in the trailing 12 months saw 131% growth, rising to 2,278 customers.

Not one of those numbers should set off alarms. The robust numbers are being generated year over year from earnings results that had already benefited from Zoom’s initial pandemic spike. 

The complete package

Second, the Zoom Platform is starting to take shape. What used to be merely a meeting application is expanding to be a complete unified communication platform. The company has already rolled out its messaging solution and Zoom Phone to make the platform more extensible and recently launched Zoom Webinars and Events.

The company has expanded the offering to address the hybrid work demand while providing solutions to boost revenue per user. Couple this with the announcement of the $14.7 billion Five9 acquisition, and the picture becomes clearer. The company is horizontally integrating and taking on the cloud contact center and growing the customer experience tools market. With this acquisition and the growing Zoom Application Platform, the company expands its total addressable market (TAM) from $62 billion to $86 billion, and opens doors to future inorganic growth. 

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Competition is the most significant long-term risk for Zoom. The company has won thus far on experience and an unprecedented surge in demand, but its competitors will not simply accept defeat. Cisco
CSCO,
+0.19%

and Microsoft
MSFT,
+1.29%

have been continuously innovating on their offerings to make the user experience better.

Perhaps more notably, Microsoft and Salesforce
CRM,
-0.59%

are going toe to toe to build a complete vertical integration that centers around Zoom’s strength: collaboration. Zoom, however, doesn’t have a full set of SaaS-based business applications, a platform for connecting the entire enterprise software suite to a company’s expansive data ecosystem, or its own IaaS offering like Microsoft’s Azure.

Microsoft is doing it through a fully integrated top-to-bottom stack and Salesforce through a complete software suite sitting on Amazon
AMZN,
+2.15%

AWS infrastructure.

Zoom, today, lacks the broader software for productivity, business, data and IT. Zoom’s platform at this juncture isn’t as complete as what Microsoft and Salesforce are building. Whether Zoom is able to address this is what investors need to keep an eye on. 

Zoom’s stock selloff isn’t based on the company’s performance. It isn’t based on fleeting demand or really anything that the company did whatsoever. It’s based on the belief that what goes up doesn’t come down, and whether it’s Microsoft, Amazon, Apple
AAPL,
+3.04%

or Alphabet
GOOG,
+0.64%
,
there comes a point where extraordinary growth isn’t 300% or 400%, but 25% or 50%. This is where Zoom is today, and there is nothing wrong with that.

Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising, and/or consulting to Microsoft, Zoom, Salesforce, AWS and dozens of other companies in the tech and digital industries. Neither he nor his firm holds any equity positions with any companies cited. Follow him on Twitter @danielnewmanUV.

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