We’ve had a series of Initial Public Offerings recently that would have been better labeled as Liquidity Events. Venture Capitalists and early stage investors (including the founders of the company) need to turn their paper money into real currency and things (like homes & nest eggs). So, they go public. Many of these companies are staples of our new sharing, connected and gaming economy, such as Lyft, DropBox and Snap Inc. (Click on the blue highlights for my original IPO warnings on Lyft and Snap Inc.) However the challenge for investors is often more one of valuation, or profitability. If you get caught up in the story of how the company is transforming the landscape of our lives, and fail to look at the fundamentals of sound business, you might drink the Kool-Aid and wake up with losses.
So, is Zoom more of a Lyft or more of a Google? Google’s IPO was one of the strongest of all-time. The company had a strong executive team and board, had doubled in revenue growth and was profitable. Google launched in 2004 – just two years into the bull market, so it also had the wind at its back in terms of macro movement. Let’s line up the numbers of Zoom …
Zoom has many strengths. The company is the best-in-class. It is achieving viral marketing of its video conferencing by offering free conferences to everyone (with limited time and number of attendees). Many of those freebies, and the friends they invite in, are becoming paid subscribers. The company is also profitable, bringing in $7.6 million in net income for fiscal year 2019. Revenue doubled year over year (up 118%), to $330.5 million.
Zoom was named #2 Best Company to work for by Glassdoor in 2019, and Eric S. Yuan, Zoom’s CEO has been racking up the awards for his leadership. However, there is an issue with the board. It’s overweighted with finance people, and underweighted with technology leaders, government relations specialists, product visionaries and marketing geniuses. So, whereas Google was finding ways to diversify its revenue stream under the experienced guidance of Eric Schmidt, it appears that Zoom is focused mainly on subscriptions. This will be a problem if the economy weakens, and individuals find that basic expenses outweigh their desire to convene.
Also, when you get too many finance people in the room, there can be too much focus on monetization, and not enough on innovation. The worst example of this was the Sears Holding Co. board. So far, Zoom is doing everything right. However, Microsoft is likely to awaken and want to make Skype more competitive, and this is where the technology and government relations oversight can be key.
Zoom shares are expected to hit the NASDAQ stock exchange this week, with trading to start at $28-$32/share. According to Business Insider, at the high end, that would make Zoom Video Conferencing (symbol: ZM) valued at $8.25 billion.
Investors have become too complacent with lofty valuations. At the current growth rate, Zoom’s revenue should grow to over half a billion this year. However, the actual earnings ($7.6 million) are a small fraction of the valuation. Even if the earnings triple or quadruple as revenue scales, the valuation of $8.25 billion is still rather rich. If the market were going up, then perhaps you could make a case of buying Zoom high, in the hopes of selling higher. However, there are at least 10 events and economic concerns going on this year that could drive general market weakness. (Click to read those.)
So, here’s another unicorn that might be worth more to look at (or to use) than to own, at this time and price.
By looking behind the splashy painting, and into the fine print of the numbers, you, too, can identify the Unicorn IPOs from the Zombies. It’s no accident that my track record on these IPOs is so high. (Lyft and Snap weren’t the only IPOs I said to avoid. Google wasn’t the only one I touted on television.) If you’d like to learn these strategies firsthand, join me at my Colorado Investor Educational Retreat this April 27-29, 2019. I’ll also be hosting a Real Estate Master Class the day before (April 26, 2019). Click on the flyer links below for additional information, including the 15+ things you’ll learn and VIP testimonials. Call 310-430-2397 to learn more and to register now.
Article originally posted on nataliepace.com
Natalie Wynne Pace is the co-creator of the Earth Gratitudeproject and the author of the Amazon bestsellers The Gratitude Game, The ABCs of Money and Put Your Money Where Your Heart Is (aka You Vs. Wall Street). She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical).