Slightly off-piste with this next post but I thought it too interesting not to share. The video conferencing platform provider, Zoom, is set to IPO this year (link to SEC filing) and from all reports it is going to rank as one of the major IPOs of recent years. It seems to me, however, that someone, somewhere is smoking something because the valuation seems off the charts.
To give a breakdown: The price at IPO is expected to be between $28-$32 per share. If we take $32 per share (most folks are expecting it will increase significantly after IPO, circa 30%), this would give Zoom a market value of $8.25 billion. The company’s full year revenue for 2018 was $330.5 million, giving Zoom an enterprise value to sales ratio of 24.5. Profits in 2018 were $7.6 million, giving an EBITDA margin of circa 2.5% and EBITDA multiple at IPO of over 1000x !!!
There has been strong growth, the company has experienced >100% revenue growth Year-on-Year for the last 3 years, albeit that growth rate slowed last year. In addition to this growth, Zoom is also profitable and in an age where Silicon Valley has become accustomed to companies burning hundreds of millions each quarter, being profitable is seen as a pretty strong reinforcement of the business model (think of Lyft, for example, who burnt $900m last year). The combination of strong growth and profitability is likely to be the reason why the valuation is so high.
Zoom is being compared to companies like Atlassian and Lyft but these are transformational software platforms. Atlassian, as an example, has revolutionised the way businesses manage software change, and in a world that is rapidly moving digital, it’s perfectly positioned to take advantage of a huge opportunity in the coming years. Plus when you start using Atlassian, it becomes embedded in the very fabric of your company’s every day. So even if you wanted to, it’s very hard to move away (plus Atlassian is founded by Aussies, so that makes it even more amazing – “Aussie, Aussie, Aussie, oi, oi, oi!”).
The real challenge for me is in the value Zoom’s software provides to its users. We have been using Zoom in our organisation for roughly 2 years now. Its best assets are its ease of use and reliability, it is intuitive, and it just works, without fail. In 2 years, I don’t think I can remember one outage that has affected us. And in the world of Skype/Microsoft buggyness, reliability is actually a strong differentiator. But at the end of the day, it’s video conferencing, and that technology has been around for years. The features set is not overly innovative and at times the user interface can seem a bit dated and the functionality a bit clunky. One thing that frustrates me at times is that you can schedule an Outlook meeting directly from Zoom, which puts the meeting in your recipient’s and your Outlook calendar and at the same time reserves a conference session in Zoom. But if you shift the meeting in Outlook, it doesn’t sync back to change the conference session in Zoom, so you have to delete everything and start again or setup a separate standalone Zoom session. A bit frustrating at times.
It does seem like Zoom have tapped into the integrated model well, allowing easy integration of their software into 3rd party application, Telehealth, for example, seems to be one area they are focusing on. But this model seems to lessen their revenue opportunity to just the traffic, rather than revenue from the service package itself, which, in this model, the 3rd party is benefiting from.
Balancing all this, the multiples just don’t add up for me, particularly when you consider the value proposition to the user isn’t transformational and the fact that the margins are still so thin. It doesn’t take much of a hiccup in the business to swing from profitability to loss-making when you’re turning over >£300m and only earning $7m. I’d suggest they have capitalised on a window of opportunity when Skype was experiencing significant issues as it was integrated into Microsoft and they attempted to evolve the platform.
But hey, hats off to them, if you can get it then more power to you. And for the average investor, if you get in at IPO, or as a short term investment post IPO, it’s probably a no-brainer. Investors love these Silicon Valley software companies so everyone will be looking to catch a piece of it, pushing up demand and the share price before any of these fundamentals might become apparent.
By Hamish White
Hamish White is the Founder and CEO of Mobilise and is an international Mobile telecommunications expert with 20 years’ experience covering 4 continents, with a speciality in managing greenfield or transformation projects.