This analysis touches on controversy surrounding Zoom, what they’ve done about it to reassure investors, their 10-K report from March 2020 and financials included, and lastly, a technical analysis of Zoom stock to understand the stock’s incredible momentum and potential downfalls.
Scroll to the bottom if you want a summary because tl;dr.
1. Concerns with Zoom’s ties to China
Zoom is technically an American company (headquartered in San Jose, California) with CEO Eric Yuan who was born in China and holds American citizenship.
a. Privacy Concerns
The concerns that have arisen are due to privacy concerns, as you may have heard of already. Here’s a short list of the concerns and resolutions:
- Redirecting data to China: Partially resolved. Zoom says you can control where your data goes by opting out of certain data centers if you’re a paying user, and that your data will only be routed through a data center in your country if you’re a free user. They also stated that they removed “HTTPS tunneling servers in China to prevent any inadvertent connection through China.”
- Deleting accounts at Chinese government requests: Resolved and acknowledged by Zoom. They state they will no longer ban meetings, but instead block based on geographical border restrictions. This also specifically includes Chinese government requests to not impact anyone outside of China.
- Data is not encrypted for free users: Resolved. Eric Yuan himself wrote in the Zoom blog that they will start to develop and roll out end-to-end encryption (E2EE) for all free users, not just paying users.
- Various instances of bypasses to gain control over the host’s computer or install malicious software on multiple operating systems and versions: These have been fixed by Zoom fairly quickly after being discovered.
b. Potential Conflicts of Interest
Other ties to China include their research and development team and engineers. According to SEC filings from Zoom, they state they “operate research and development centers in China, employing more than 700 employees as of January 31, 2020” and they also state:
…our product development team is largely based in China, where personnel costs are less expensive than in many other jurisdictions. If we had to relocate our product development team from China to another jurisdiction, we could experience, among other things, higher operating expenses, which would adversely impact our operating margins and harm our business. In addition, we would need to spend considerable time and effort recruiting a new product development team, which would distract management and adversely impact our ability to continue improving our platform’s features and functionality.Zoom Video Communications Form S-1 Registration Statement, page 25
To summarize that long quote (that my business communications professor would’ve killed me for including) Zoom would not want to change from Chinese employees to “western” employees because it would cost them more time and money to employ non-Chinese citizens. However, because of the large existence of Chinese employees which are required by Chinese law to report information to the government and enforce Chinese law, this makes for a very real conflict of interest for their engineers at the very least.
2. Company Analysis
a. Main and Unique Risk Factors (2019 10-K, pg. 9)
If you’ve considered investing in Zoom or if you’re questioning the company itself, take a look at these risks and ask yourself if you see any of these happening in the near future.
- Declines in new customers, renewals, or upgrades
- Difficulty forecasting operations results (due to limited history)
- Operating in a competitive market
- Declines in demand for video conferencing service
- Maintaining third-party integrations
- Inability to respond to rapid technological changes, extending the platform, or developing new features
- Failure to market the platform to enough customers to continue growth and reach an international market
- Platform security being compromised and leading to a weakening of the brand
- Being able to execute the business strategy
- Retaining and gaining qualified employees to maintain the happiness-centric culture
- Changes in government policies
- Failure to offer high-quality support
- Failure to comply with privacy, data protection, and information security laws, regulations, and obligations
- Currency exchange rates with relation to the dollar
- Sales to government entities can be more competitive, expensive, and time consuming than other sales. Government certifications may change. Governments generally have more leverage in negotiations. Government payment for the sale may be affected by budgets and funding authorizations.
b. Aspects of Zoom’s Growth Strategy (2019 10-K, pg. 4)
- Keeping customers happy
- Customer acquisition
- Customer growth (growth within multiple departments of an organization)
- Innovation of the platform
- International expansion
- Developing integrations with partners and expanding the platform itself
c. Key Factors Affecting Zoom’s Performance (2019 10-K, pg. 39)
- Acquiring New Customers (this has been repeated three (3) times! It’s apparently very important)
- Expansion of Zoom Across Existing Customers (kind of goes hand-in-hand with the above factor)
- Innovation and Expansion of the Platform
- International Expansion
d. Other Points of Interest
- Board of Directors Composition: Consists of 8 independent (outside) directors and 1 dependent (inside) director, which is the CEO. This is likely a positive aspect of the company, as more independent directors provides a higher level of corporate governance.
- They do not intend to ever pay cash dividends in the future, and are rather reinvesting earnings into their company (2019 10-K, pg. 35).
- Total Insider Purchases and Sales as Reported: There are more insider sales than purchases, indicating poor sentiment of the company or stock value from the inside.
e. Market Competitiveness
- Zoom believes they compete favorably in the following areas against competitors:
- Video quality on their platform
- It’s pretty good from my experience. But not amazingly better than any other video calling software.
- Architecture (because it utilizes cloud technology natively)
- Wow, so special. It’s not like your competitors do this too or anything… Also, this is just a shitty buzzword cluster that doesn’t make sense. A business person probably wrote this and thought they sounded smart (the irony).
- “Functionality and scalability”
- Again, every company does this.
- “Ease of use and reliability”
- Haha… tell that to my grandfather and his partner who had a hard time figuring out how to use Zoom. If some older folks can’t learn how to use it, I wouldn’t call it easy to use.
- Ability for customers to use their existing infrastructure to hold video calls with Zoom
- AGAIN, their other competitors do this already. Who do they think they’re fooling?
- Cost for a business? Yeah, it looks pretty good for smaller businesses (see analysis below) if you absolutely need video conferencing software and not just some free alternative.
- Video quality on their platform
- Porter’s Five Forces Analysis
Since Zoom’s closest competitor is arguably Cisco’s WebEx, I referenced this blog that goes over the differences between the two. To simplify the difference, well, it really depends on what kind of business you are. If you’re a smaller business (like a startup for example) Zoom might be a better cost and usage choice if you absolutely must have business video conferencing software and you’re dying to spend money on something. WebEx appears to be a better and more cost-effective choice for large corporations. Fun fact: WebEx is also being used by congress (as opposed to Zoom) because “muh scary Chinese engineering spies.”
f. Financial Health
|Free cash flow
|Gross profit margin
Additionally, beta is reported by Zacks as -1.48 and by MarketWatch as -0.08 (as of 7/24/2020), so there is a large discrepancy on what Zoom’s beta should be. However, both betas are negative which indicates that Zoom’s price performance is moving in the opposite direction of the general stock market. That’s probably fairly true, as people have been investing in Zoom to avoid the rest of the fucked corona market.
- Price-to-sales ratio: Between Q1 2019 and Q1 2020, the price-to-sales ratio has been increasing. This means that Zoom’s sales are becoming more valuable to investors. If we compare them to Cisco (WebEx), we see that Zoom’s ratio is much higher than Cisco’s price-to-sales ratio, which is at 3.57 as of Q1 2020 (and decreasing over time). With this comparison, we can determine that Zoom’s PS ratio is probably too high, making its sales overvalued.
- Net income: Net income has increased greatly since Q4 2019.
- Free cash flow: Free cash flow has also increased greatly starting in Q1 2020. This appears to be mostly influenced by the common stock they issued during 2019.
- Current ratio: This ratio decreasing over time means that Zoom may have a problem paying their short-term debts in the near future. However, it can also be interpreted as an increase in efficiency with their assets, securing more financing, or they’re more effectively managing their working capital. It’s too early to tell, but the current ratio should be monitored.
- Cash-to-debt ratio: This ratio has been going up a bit, but is generally way higher than the average (probably). Cisco’s ratio as of Q2 2019 is 1.78, for comparison. As you might expect, this is because Zoom has an insane amount of cash and cash equivalents, and a small amount of total debt. Cisco also has a lot of cash… but the difference is they have a fuckton of total debt. It’s funny, because this is considered a more conservative measure of a company’s ability to pay off debt, but Zoom still has a very high value. Anyways, this means Zoom can pay off their debt with cash 15 times over, roughly.
- Debt-to-equity ratio: The debt-to-equity ratio is very low, again, because they have low as fuck debt and a LOT of stockholder’s equity. This means that Zoom does not carry a lot of risk because they are not very leveraged on debt.
- Gross profit margin (AKA gross margin %): Here’s an interesting one. Their gross profit margin was going up a little each quarter until Q1 2020, where it dropped a lot. This is due to cost of goods sold (COGS) going up a lot. Since it’s subtracted from revenue in the gross profit margin calculation, that means an increase in COGS would mean a decrease in the gross profit margin. This generally isn’t terrible, but I would keep an eye on it to see if they keep increasing COGS. Cisco’s gross margin is 64.85%, for comparison. So… as long as they’re around that number they’re probably okay.
3. Technical Analysis
This section mostly applies to price movements that will occur soon.
a. Moving averages
The moving averages that average over shorter periods of time (10-30 days) are warning that the price is dipping below the average. The price started dipping below the 10-day moving average, then the 20-day and 30-day from the 10th to the 16th of July. It went back up probably because investors were buying it at a discount. However, it went even further below all the moving averages by the 24th with less recovery this time. This is a definite sell signal.
b. Williams %R (14)
Williams Percent Range basically measures overbought/oversold levels by using the current closing price versus the highs and lows of the past x amount of days, in this case it’s 14 days. Not much to say about this other than it’s teetering towards oversold levels.
Another thing to note is the decrease in trading volume for Zoom, which would also slow momentum down.
Zoom is, and probably will continue to be, in boiling water regarding their ties with China and tensions increasing between the United States and China. This will probably lead to uncertainty amongst investors.
It’s a tough decision for any investor… whether to hold onto Zoom because of “dat price performance” or sell while you’re in the positive because there’s some warning signs (like any price-to-x ratio, the current ratio, high insider selling, somewhat high shorted shares %, etc). It’s crazy hype for this company (as indicated by their insanely high P/E ratio (around 1400 at the end of July).
My take? There’s no way in hell I’d buy this stock right now. I had some shares before, but I sold them when I heard they could be tangled up in all the China tensions. That, combined with the obvious overvaluation and high insider selling just tells me to stay away. But hey, if you want to take that risk, then go ahead. I just rode the momentum wave while it was good, no interest in long-term investment for this one. It could be a shorting opportunity though!