Returns as of 10/24/2021
Returns as of 10/24/2021
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Zoom Video Communications (NASDAQ:ZM) was one of the biggest beneficiaries of the COVID-19 pandemic in terms of the positive impact on its business. And despite the world starting to return to normalcy, one of our Fool.com contributors decided to add to his position. In this Fool Live video clip, recorded on Oct. 11, Jon Quast discusses the reasoning behind his recent investment decision.
Matt Frankel: This is Zoom and I’m really curious to see what Jon has to say about this. I didn’t realize you bought this, so give us a rundown on why you like Zoom so much right now.
Jon Quast: I think that I started acquiring Zoom stock, maybe, six-ish months ago. Then I just recently added to my position. It’s been one that I’ve been dollar-cost averaging over time. We’ve talked a lot about Zoom in recent episodes of Live and Backstage Pass. I just want to share something here. Before I share my screen actually, I wanted to share real quick both Latch and Zoom for me. I’m going to talk about optionality. The thing that I love about this concept of optionality is that when there’s a low cost to the opportunity, but a potential high payout of the opportunity, that can be a really powerful thing. Both Latch (NASDAQ:LTCH) and Zoom have that in my opinion, but we’re going to look at some optionality with Zoom and why I really like it.
First of all, we’ll just say that Zoom has, by and large, held onto their core customers in Zoom meetings. That’s their No. 1 product, that is what most people or most businesses, excuse me, have, is this Zoom meetings product. We’re lapping the pandemic and they’re holding onto that. They’re not growing like they were in that category, but they are holding on to the majority of the business that they have. Now they have optionality in Zoom Phone and Zoom Rooms. Less than 5% of their current customers have Zoom Phone product, less than 5% have Zoom Rooms. Zoom Phone is the digital upgrade, the Zoom operating system of their internal phone infrastructure. Let’s call it that. Zoom Rooms.
This is the modernization, the digitization of the old-fashioned conference room, making this a literal physical space, but it’s a Zoom Room, adding that onto the existing product. This is a case study that they get from Zoomtopia, their Zoom annual investor event. This is just one case study from a large financial services company. They started out in fiscal year in ’19 with Zoom Meetings and Zoom Room. This is what those things were doing. Over time, those two products have grown and what this company is spending.
What you see right here, this greenish blue, I don’t know if that’s green or blue, but the circle here, basically, when they added Zoom Phone to their subscription, it’s 4X now, what they originally were spending just three years ago. It shows how tremendous the optionality here is with Zoom Phone. Like I said, less than 5% of customers currently have Zoom Phone. What if half of their customers were to upgrade to Zoom Phone? Not every case is going to be 4X what they were originally spending, but it shows that there is incredible upside just with Zoom Phone.
Case study No. 2, large retail company initially had meetings in Zoom Room, but they bought Zoom Phone here in fiscal year ’20. Now in fiscal year 2022, they’re spending 3.7 times what they were back when they initially got Zoom in fiscal year 2019. Again, just three years, now they’re 3.7X in their spending. That’s incredible. Those two products, how much it could potentially add to Zoom’s revenue? We talk about the slowing growth with Zoom, after the pandemic. Now we’re moving past it. Now it’s slowing. They’re not acquiring as many customers as they were before. I really liked the potential merger with Five9 (NASDAQ:FIVN). I really thought that that was going to jump-start the customer growth again because you’ve got the customer bases from both, but that’s not happening anymore.
The customer growth has slowed, but look at what the revenue potential growth is if they can just get these current customers to upgrade to new products. Then Zoom Apps, in my opinion, is the ultimate optionality lever on the market today. For those who don’t know, Zoom has created an ecosystem where you can have an app natively run inside the Zoom meetings. What does this look like? For example, DocuSign (NASDAQ:DOCU) has created an app that is used natively within Zoom. You’re in a Zoom meeting and you are inside of the Zoom meeting signing something on DocuSign. The apps take place inside.
They have created a $100 million venture fund to fund app development. Zoom management doesn’t know where this is going to go. In fact, they noted that one of their app developers is working on launching video games inside of Zoom meetings. Zoom management is like, ”Well, we didn’t think of that.” That’s the whole point of this $100 million dollar venture fund. They are just funding developers. You have an idea, here’s some money. We’d love to see what you do with it. What’s interesting is this is less than 2% of Zoom’s cash. Less than 2% is $100 million. They have $5.1 billion in cash and it’s growing. There’s very little downside to doing this, but what is the upside potential? The upside potential is a use case that even Zoom management hadn’t even thought of. This is why I like Zoom going forward. I see its core product as being sticky and they’re retaining what they have and it’s extremely profitable as is, but I see optionality levers going into the future.
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