Thanks to the novel coronavirus pandemic, video conferencing stocks have gone from relative obscurity to center stage in a matter of weeks.
That is, back when the world was “normal” in January, video conferencing software was largely a luxury for enterprises. Long story short, big companies that had extra cash to improve employee mobility and workflow flexibility had video conferencing software. Most research suggests that 100% of Fortune 500 companies in 2019 had a video conference software solution of some sort.
However, smaller companies that didn’t have the extra cash didn’t buy into the video conferencing trend. Less than 40% of small-to-medium sized businesses (SMBs) in the U.S. were subscribed to video conferencing software in 2020. And that’s in America, which is supposedly the most advanced economy in the world. Globally, one can easily assume that video conferencing software adoption rates among SMBs was much, much lower.
Emphasis on the was…
Today, the world is no longer “normal”. Thanks to the coronavirus pandemic, we are all working from home. In that environment, video conferencing software isn’t a “nice-to-have” solution. It’s a “must-have” solution. So, millions of SMBs across the world are likely adoption video conferencing software of some sort. Many of those SMBs will stick around as long-term customers, too.
The implication? It may be time to buy video conferencing stocks.
Or not… because many video conferencing stocks have already staged huge rallies amid the outbreak. Are they too expensive now? Is there more room to run?
It depends on the company.
But with that in mind, here’s a list of three video conferencing stocks that deserve your attention right now:
So, let’s dive in.
Video Conferencing Stocks that Deserve Your Attention: Zoom (ZM)
Of the three video conferencing stocks on this list, Zoom has by far attracted the most attention from both Main Street and Wall Street.
On Main Street, Zoom has become the go-to video chatting solution for consumer group chatting, virtual cocktail hours and other virtual social events. Why? Well, it’s due to Zoom’s premium video quality Accordingly, Zoom has seen its daily active user base swell from 10 million users in December 2019, to 200 million daily actives in March.
That’s a huge jump, and Wall Street noticed. Throughout February and March, investors pushed ZM stock up from around $70 to $160.
But, I wouldn’t chase this rally.
In the $100-plus range, Zoom stock is priced for absolute perfection — and perfection isn’t going to happen.
The recent demand surge is mostly from free users, and it will be very tough for the company to turn that free demand into paid demand. Amid the surge in free demand, customer support and the user experience for paying customers has dropped substantially, forcing some customer churn. Also forcing some customer churn — and government bans — are a plethora of privacy and safety concerns. Meanwhile, expenses are ramping because of increased usage, and that’s putting pressure on profit margins.
Zooming out, all is not perfect in the Zoom kingdom. ZM stock is priced for perfect, but this discrepancy makes the stock unnecessarily risky.
Of the three video conferencing stocks on this list, RingCentral is my favorite or a few big reasons.
First, RingCentral is much more than just a video conferencing software provider. The company is a leader in the Unified Communications as a Service (UCaaS) market, which essentially comprises unifying all enterprise communications like voice, video and messaging into a single software platform.
Thanks to a broader enterprise virtualization trend and increase in employee mobility, the UCaaS market is projected to grow at a big pace over the next several years. And in turn, RingCentral should sustain big growth alongside this burgeoning market.
Second, thanks to new product launches at a perfect time (such as a new video conferencing product), RingCentral is well positioned to turn rising demand for UCaaS services amid the coronavirus pandemic into rising revenues in Q2 and Q3.
Third, relative to other video conferencing stocks, RNG stock is attractively valued. That’s not to say the stock is attractively valued on an absolute basis. It’s not. But all video conferencing stocks are naturally overvalued today amid the coronavirus pandemic. In that group of overvalued stocks, my models suggest that RNG stock is one of the more attractively valued names.
Last, not but least, on this list of video conferencing stocks to watch is 8×8 — a smaller, more niche player in the video conferencing market.
8×8 provides both UCaaS and Contact Center as a Service (CCaaS) solutions. That essentially means that the company provides communication tools to help employees communicate with one another (the UCaaS part) and with customers (the CCaaS part). Integrating both of these services into one platform is a unique value prop of 8×8.
Also unique to 8×8 is its focus on small-to-medium sized businesses. These businesses — which 8×8 defines as customers with revenue under $1 billion — comprise 82% of the 8×8’s annually recurring revenue.
Although this niche gives 8×8 some attractive defensiveness, it also limits growth. The UCaaS and CCaaS markets are both exceptionally competitive. Once 8×8 saturates the SMB vertical, the company could run into stiffer competition for bigger enterprise contracts. That bigger competition could sap growth.
It also doesn’t help that 8×8 is already spending an arm and a leg to grow, with deteriorating gross margins, and negative net profit margins. In other words, there’s not much room for 8×8 to up marketing and product development spend to compete with bigger fish.
All things considered, then, EGHT stock deserves your attention. But, as far video conferencing stocks go, it’s not the cream of the crop.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.