by maxprtr

This week, two things happened. Fastly down 30%+ after a revenue warning. And Zoom rose to a record after its Zoomtopia analyst event. The year of 2020 has once again amazed me. I guess I ‘m getting old.

Fastly reports preliminary Q3 revenue 70-71 mil, which is 5.6% lower than estimated 74.7 mil (Bloomberg number). This 5.6% drop in revenue triggered a 31% selloff, but I was not surprised by that. I knew this would happen one day. As I quote a Bloomberg article “Fastly’s slowdown highlights the precariousness of lofty software valuations. Massive share plunges are the price paid when these businesses fall short of perfection.” Exactly, a perfect dream is destined to end in our imperfect world.

Even though the FSLY lesson has come out, investors are not learning anything at all.

Zoomtopia

ZM’s meteoric rise surprised me. Ahead of the Zoomtopia event, on Monday, ZM’s price was 491.54. Today it traded at a high of 563, a 14%+ rise. So what happened on the Zoomtopia event that has caused such a ZM euphoria?

ZM announced a couple of new features. One is the “OnZoom” , which allow users to sell tickets for their Zoom calls, so they can teach classes, hold concerts etc. for a profit. Basically, ZM is moving into the paid live streaming business. The other new thing is “Zapps”, apps that run inside Zoom. For example Slack, now you no longer need to open Slack in parallel to Zoom, you can simply use Slack inside Zoom (with reduced functionality). So basically, this saves you just a couple mouse clicks when conferencing. These announcements are certainly positive. The company would do better with them than without. But just how much better? Just a reminder, no matter how fancy the new features are, if they don’t help make money, they would not matter at all. So let’s think about how much money will these new features help Zoom make.

Long $ZM has become a new pandemic

On Wednesday, I was watching the analyst’s call, via the Zoom link they provided. There were quite several ass-kissing questions, like what is Zoom’s culture, philosophy, futures of our world blah blah. One practical question finally appears, when an analyst asked about how Zoom plans to monetize on the new OnZoom and Zapps feature. And the CFO’s answer was, “This is new. We are not sure. We are looking at it. We will probably find out in next several quarters.” FYI, Zoom is not taking a cut from the ticket sales. (support.zoom.us/hc/en-us/articles/360050178332#h_01EMH8B5ND84F6XSSTPVKY75E7) There is no evidence Zoom will take a cut in the future. There is no evidence Zoom will charge third-parties to develop Zapps either.

Hmm, Ms. CFO, you are not telling us much, How much money on earth are your new features worth?

When the profitability is an uncertainty to the company’s own insider CFO, it has not been an uncertainty to the financial analysts. A slew of analysts upgraded their target prices. RBC upgraded from 450 to 600. D.A Davidson upgraded from 457 to 600. And Berstein, they upgraded from 228 to 612, a stunning 384$ per share increase, or a 75 billion dollar increase in valuation (ZM has about 200mil shares outstanding). Ok folks WOW. In a professional analyst’s opinion, An online ticketing feature, plus an app feature that pretty much only saves you a couple of mouse clicks, are worth 75 billion USD. Hey, remember how much money Oracle offered to buy TikTok? 20 billion. This values TikTok at about $50b (www.reuters.com/article/us-bytedance-tiktok-exclusive-idUSKCN24U1M9) One Zoomtopia event, just pumped ZM’s valuation by 1.5x TikTok.

If Ms. CFO does not tell us how much more money ZM expect to make. Let’s make some comparisons with existing, well-established companies doing similar business. Paid online courses website Udemy, one of the biggest, is valued at 2 billion. (techcrunch.com/2020/02/19/online-learning-marketplace-udemy-raises-50m-at-a-2b-valuation-from-japanese-publisher-benesse/) Popular streaming services like Twitch, is worth 15 billion. (www.cnbc.com/2020/06/16/amazon-media-assets-worth-500-billion-almost-as-much-as-aws-needham.html#:~:text=To%20get%20to%20%24500%20billion,says%2C%20is%20worth%20%24127%20billion). How can a feature in its infancy, increase ZM’s valuation by more than the total worth of huge established companies? Zoom’s uncertainty has become better than other company’s reality.

If you say these companies are not comparable to Zoom’s new ticketing feature, I’ve got another example. Facebook added ticketed live streaming feature on Aug 14 (www.hypebot.com/hypebot/2020/08/facebook-adds-ticketed-live-streams-waives-all-fees.html), pretty much exactly what ZM is offering, And last time I checked, FB has more users than ZM? FB stock dropped on Aug 14 and 15. So why should ZM rise 14%?

There are also more rational and skeptical analysts apart from the Bernstein dude. Credit Suisse’s new target stands at 315$ and Morgan Stanley at 350$. (tbh, I have not even heard of Bernstein or DA Davidson before. Morgan and Credit Suisse of course everybody knows). But nobody is mentioning these. People only believe in what they want to believe (confirmation bias). Zoom has become their religion. From twitter to stocktwits. the story of “Zoom to the moon” is getting infectious. Long Zoom has become a new pandemic.

Tesla is saving the earth. Is Zoom too?

My story is not over. The massive increase in ZM’s valuation is not the only absurd thing here, its valuation before Zoomtopia, was already insanity. Zoom’s FORWARD P/E ratio is at 211.9 (Bloomberg EEO next 4 qtrs est), and trailing P/E ratio is 518.47. In case you do not know what forward P/E ratio means, it is the P/E ratio for the next 4 quarters based on earnings projections, so it has accounted for the benefit ZM received from the pandemic. Wait a sec. Tesla’s FORWARD P/E is only 160.58. ZM’s forward P/E is higher than Tesla? Our world is warming, is on fire, and EV is saving the earth by reducing fossile fuel consumption. Is Zoom, a video conferencing company, going to save our planet too? Plus, Tesla’s P/E is high because its growth is yet to be realized. EV sales are expected to explode over next few years. Most of ZM’s potential has already been realized from the pandemic. How will ZM’s growth continue to explode after the pandemic is over?

Or do you really believe in a permanent WFH world? Do you really believe in a world where everybody is at home, downtown area is empty, offices are all vacant? There are success stories in battling Covid, like China or Singapore, where most people are back in office already. Also today Pfizer just announced its vaccine may be put in use as early as late November (www.wsj.com/articles/pfizer-could-apply-for-emergency-use-of-covid-19-vaccine-by-late-november-11602842906) But apparently, market thinks this has no impact on Zoom at all. It’s true that some big tech firms can afford to have employees work permanently from home. But many of them do not use Zoom. Microsoft and Google both use inhouse tools (Team and Duo) and ban Zoom. Even if they WFH forever, does it benefit ZM? Moreover, customers with fewer than 10 employees represent 36% of ZM’s Q2 revenue (Goldman Sachs research). Even if tech WFH forever, do you think teams smaller than 10 will too? How does ZM retain this 36% of earnings?

ZM, the next FSLY?

One last note on the numbers. Before FSLY’s 30% tumble, its price to sales ratio was 35. Nasdaq index’s average P/S ratio is 5.1. ZM today is at 54.59 (Bloomberg BEST_PX_SALES_RATIO). ZM is going to report Q3 earnings on Dec 6. It’s estimated EPS is 0.753, a 736.32% YOY growth. If similar to FSLY, its revenue misses by 5.6%, do we expect a 31% drop too?

Here’s my question to my dear WSB retard friends. When people finally realize the future is not that rosy for ZM. How much is it going to tumble?

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.