Does Zoom Have Staying Power?

Zoom Video Communications (NASDAQ:ZM) has seen a tremendous tailwind from massive adoption during the coronavirus, but over the last six months, the stock has seen a considerable decline. On a Fool Live episode, recorded on April 14, Fool contributors Brian Stoffel and Brian Feroldi discuss this video platform’s latest results and why the company will likely continue to be relevant for years to come.

Brian Stoffel: I’m talking about a little company that is helping us come to you today, and that is Zoom communications. Here’s the thing about Zoom. Zoom, while it seems like everybody knows what it is and obviously everyone thinks it is the pandemics stock, let me just show you what it’s been like for shareholders since last fall. It hasn’t been as much fun. But we are long-term investors here and so we like to keep our eye on the long term.

Let’s just review the numbers that the company published during their most recent fourth-quarter earnings report. Revenue was up 369%. For those of you keeping track at home when you’re up 100%, that actually means you have doubled, even though that’s a one, you’ve doubled. They almost 5X’d their revenue. They obviously see the growth that they saw during the pandemic slowing in the years to come. At the same time, I don’t think that this company is going anywhere.

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The number of customers with at least 10 employees was up 470%, almost 6X. The number of customers, this is a big one. Maybe if I had to choose one or two metrics that were the most important this will be one of them. The number of customers contributing more than $100,000 per year in annual recurring revenue was up 156% to over 1,600 customers and then net-dollar expansion rate with customers over than 10 employees was over 130% for the 11th consecutive quarter.

The reason that I think that those two are the most important is because those point toward high switching costs. What do I mean by that? If you’re spending over $100,000 a year using one interface or one tool to communicate either with your employees or your audience, you’re going to need a pretty good reason to switch. Like Zoom either has to stumble mightily, or someone needs to come out with a product that is markedly better than anything else. My quick and easy way for saying this is just that, actually, you know what? Brian, I’ll let you ask your question because my answer is endless.

Brian Feroldi: Does Zoom have a moat and if so, how wide is it?

Brian Stoffel: I’ll admit that is not as wide there’s some of the companies that I like to invest in. But I try to imagine what would happen if we switched tomorrow to do Motley Fool live and the headaches that would cause for us, for our viewers. I had to go run out and get a new computer when we switched to Zoom. One of the things that makes Zoom work is that it works with the amount of capacity your computer has to work ideally to get your message across to whoever you are on with.

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I think they [have] a wider moat some people give the company credit for, not as wide as some of my favorite investments, but I still think that this company is going to be really relevant five years, 10 years from now and so it remains a holding for me.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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