I’ve met with Zoom Video Communications’ (NASDAQ:ZM) CEO and founder Eric Yuan several times. He’s soft spoken and humble. He also has a laser focus on his customers (keep in mind that the company’s Net Promoter Score (NPS) is over 70, which is exceptional).
No doubt, Yuan’s efforts have paid off in a big way. Today the company launched its IPO and yes, it’s a mega offering. The ZOOM IPO priced 20.9 million shares at $36, which was after there were two increases in the range. In the deal, Salesforce.com (NYSE:CRM) agreed to invest $100 million. ZOOM also has some other notable strategic investors like Atlassian (NASDAQ:TEAM) and Dropbox (NASDAQ:DBX).
The valuation? Well, the ZOOM IPO is now at $15.8 billion, with the stock up 75% on its opening. By comparison, the valuation was $1 billion in early 2017.
The ZOOM IPO comes on a day when Pinterest (NYSE:PINS) pulled off its own offering. That company priced 75 million shares at $19 and so far in today’s trading, the stock is up 22%.
And it’s a good bet we’ll see more new IPOs come to market in the coming months, such as Uber, Slack and Palantir.
Background on the ZOOM IPO
As a college student in China during the 1980s, Yuan wanted to use technology to communicate with his girlfriend (by the way, she is now his wife!) This is why he was so attracted to WebEx, which he jointed as a founding engineer in 1997. He got a quick education on what it’s like to be a part of a hyper growth company.
But when Cisco (NASDAQ:CSCO) acquired WebEx, things changed — and not for the better. Yuan provided many ideas to improve the product but there was tepid interest. So in 2011, he left to start Zoom.
His obsession was with creating the best product possible. As a result, there was little energy devoted to marketing. In fact, it was not until a few years ago that Zoom put together a marketing team.
As of now, Zoom is a full-on platform that allows for rich video, voice, chat and content sharing. It is a native cloud system — that involves a custom multimedia router — which has demonstrated much better performance than legacy applications. The goal: to make Zoom meetings better than in-person meetings.
Now, a key to the success of Zoom is that it is inherently viral. According to the S-1: “Our rapid adoption is driven by a virtuous cycle of positive user experiences. Individuals typically begin using our platform when a colleague or associate invites them to a Zoom meeting. When attendees experience our platform and realize the benefits, they often become paying customers to unlock additional functionality.”
This has translated into strong financials. From fiscal 2017 to 2019, revenues soared from $60.8 million to $330.5 million. Oh, and ZOOM is profitable. Last year, the net income came to $7.6 million and cash flow from operations was a hefty $51.3 million.
The market opportunity is also enormous. Based on research from IDC, the spending on ZOOM’s main categories are forecasted to reach $43.1 billion by 2022.
Bottom Line on the ZOOM IPO
While Zoom is a great company and is likely to see continued robust growth, the valuation remains at nosebleed levels. Consider that the price-to-sales multiple is around 47X. Actually, this is at levels for red-hot cannabis stocks!
OK then, so what now for the ZOOM IPO? It’s really tough to tell. However, it seems clear that the stock is priced for perfection. And yes, this can set investors up for disappointment. Just look at what happened with the Snap (NYSE:SNAP) IPO.
In other words, when looking at ZOOM right now, it’s best to be cautious.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.