zoom has put its investors on a roller coaster ride since it came public in 2019. Demand from
the pandemic caused the stock to absolutely skyrocket in 2020. Yet shares are currently
down 82% from their all-time high as interest in the stock has all but evaporated. Despite
that craziness we think this is still a very high-quality business with a bright future ahead
here's why we'll be buying shares of zoom today my name is Brian Feroldi and my name is Brian Stoffel
thanks to commonstock for supporting today's video as the time is recording i'm a shareholder of zoom
and i also own shares of zoom so let's talk about the company today it is valued at $30 billion
although at one point it was worth over $160 billion and when you look for the company look
under the ticker ZM not z-o-o-m which is not the same company zoom's mission is to make
video communications frictionless and secure this is simple inspirational and optional this company
really understands mission statements and even though zoom has become a household name
and a verb over the past two years we'll just reiterate that it offers a unified communications
platform primarily video communications that any individual or business can use
zoom's business model is called unified communications as a service very similar to
a software as a service business model customers pay a monthly or annual subscription fee to access
the company's features zoom's key customer base is enterprise and large businesses one of the
key metrics for investors to watch is the net dollar expansion rate for customers that spend
over a hundred thousand dollars or more each year on zoom's platform this figure recently came in
at 123% which shows just how sticky the platform is now customer acquisition costs come in at a
medium level eating up about 35% percent of the company's gross profit customer demand is robust
and the vast majority of revenue is recurring but does zoom have a moat we believe the answer is
yes first we think the company benefits from the network effect we believe that this network effect
is very low and small but once a user and company starts using it all other people in that company
need to also use zoom in order to communicate this creates a localized network effect that
does provide a barrier more importantly we believe that zoom has high ish switching costs now this is
not for individuals who don't really face any pain in switching to a different video provider however
large corporations would experience significant switching costs if they tried to do so we also
believe that zoom has become a category leader and that its brand name is extremely strong so much so
that it's become a verb you zoom somebody else we think that that very strong brand name that's been
hard won over the last couple years will serve this company in the future take all this into
consideration and we believe at worst zoom's mode is stable and at best it is expanding turning the
company's financials they are jaw-droppingly good zoom's revenue has grown at a 45% percent
compounded in a growth rate over the last three years its gross margin is over 75% and
this company has been highly profitable for many years now the same can be said for the company's
free cash flow which has been over a billion dollars for a number of years its balance sheet
is pristine and it gets great returns on capital turning to management zoom is currently led and
founded by the same person ceo eric wan who left cisco systems because he was so frustrated with
video communications technology at the time that he decided to invent his own company to compete
not only has he created a powerful tool but he's created a powerful workplace where employees give
very high marks and insider ownership is very high as well turning to potential
we think that zoom's optionality is an underrated aspect of this company everybody knows that this
company has zoom for video communications but they've also launched other features such as
chat zoom rooms webinars and even a marketplace that makes this company have more optionality than
meets the eye now when we turn to the company's operating leverage ahead we have to keep this in
mind the company was optimized for profits in 2020 and early 2021 because it couldn't spend
fast enough given its huge boost in revenue since then the operating leverage has come
down which means that there is room to grow in the future the market for communications tools
like zoom provides is absolutely massive clocking in at more than 80 billion dollars and growing
zoom has already captured about five percent of that number but the market itself continues
to expand and while zoom has made a number of smaller acquisitions lately the vast majority
of this company's growth is organic so how is zoom done for investors well despite putting
them on an unbelievable roller coaster ride over the last two years this company is still
outperforming the market since it came public moreover the company has a habit of exceeding
wall street's estimates having done so four out of the last four times in the bottom line
and how about this for a small and growing company not only does the company not really have any debt
to pay down but it is buying back shares so far so good but let's talk about the risk because there
are a few to keep in mind first and foremost is the competition the market is absolutely
littered with video communications tools like those that zoom provides and the company has
been facing off against competition such as cisco systems microsoft google apple and many
many others so there are plenty of alternatives here that investors need to be aware of when
we look at the dilution rate for zoom we need to take its history into consideration it was
diluting shareholders for its first few years as a public company but it has generated so
much cash that it's now repurchasing those shares so dilution is less of a problem moving forward
finally there's valuation while the stock is currently down more than 80 percent from its
all-time highs shares can't be called classically cheap it's much more reasonable than has been
in the past but they still could be considered slightly overvalued despite falling more than 80
from its high it's hard to call zoom stop cheap on an absolute basis we'll have more to say on
valuation just a little bit let's first turn to how the company did during its first quarter
revenue came in at about 1.1 billion dollars which was 12 higher than last year it slightly beat wall
street estimates and met its own guide zoom's earnings per share actually fell 22 to a dollar
three on a gap basis that exceeded wall street's estimates and management's guidance the company's
margins were solid across the board during the quarter with its net margin staying above 10
and while net income did fall year over year on a gaap basis free cash flow actually increased and
the balance sheet remains bulletproof looking ahead management's top-line guidance of nine
percent growth outpaced wall street's expectations while on the bottom line 91 cents per share while
down 31 from last year was also ahead of what wall street was expecting management is guiding
for full-year revenue growth of about 11 that is slightly behind what wall street was expecting
the bottom line is expected to contract due to higher spending this year although that number
is coming in ahead of what wall street was hoping for so what should we watch as shareholders moving
forward the first thing we'll keep an eye on is that net dollar expansion rate it tells us that
the company is not only holding on to its big customers but getting them to spend more second
keep an eye on the number of customers are going to spend at least a hundred thousand dollars on
this platform each year this figure has continued to move up and to the right for years and with new
products on the market we want to see that trend continue third watch gross margins those gross
margins staying above 75 is important because it means that companies believe that they're
getting something from zoom that they can't get anywhere else and fourth watch free cash flow
while earnings are expected to be slightly lumpy free cash flow never lies and this figure has been
trending in the right direction for years we want to see that continue as we said earlier the moat
for this company at worst is stable and at best is definitely widening and the thesis is very much on
track we recently reran this company through our investing frameworks and the numbers came back
very well i give this company an 82 on my quality score which is well into my high quality business
category and i gave the company an 11 which is knocking on the door of anti-fragility turning
to valuation we think that zoom has reached the maturity phase so that the price to earnings
ratio is a meaningful number for investors to look at that means that management is optimizing its
income statement for maximal net income so let's check out on a couple evaluation multiples to see
where zoom stands today first we'll look at the price to sales ratio zoom is currently trading at
7.3 times this is the lowest valuation on record using this metric next let's look at the company's
gross profit which exploded after the pandemic and today sits over three billion dollars we can then
take that number and the company's market cap to calculate that has a price to gross profit ratio
of around nine that's high on absolute terms but not that bad given zoom's profile next let's look
at the price to free cash flow ratio this number clocked in at below 21 which is again the lowest
on record and if we look at the company's price to earnings ratio a 25 while not considered cheap is
definitely the lowest it's ever been finally let's take a look at the price to forward earnings ratio
this figure is actually 27 which is above the trailing p e ratio that indicates that wall street
believes that earnings next year are about to decline however in the long term we believe that
this company's profits on a net income basis will continue to move higher so there you go that's why
we will be buying shares of zoom for our portfolio that we share on common stock we'll be posting all
these slides on common stock we encourage you to visit us there and push back on anything that
we've said in fact we'll be selecting one comment on common stock as the most insightful and common
stock will be rewarding 100 to whoever provides that comment we wanted to give a shout out to
leandro providing the top comment on our video on adobe which provided lots of color about adobe's
moat common stock will be sending leander 100 for that comment if you'd like a chance to win make
sure you head on over to common stock and leave a comment we hope this video is useful brian's out