Zoom Video Communications (NASDAQ:ZM) offers a nice videoconferencing app that a lot of people are using right now. But nothing — not even ZM stock — should be worth 80 times revenue in this market.
The shares jumped 12.5% on April 23, then another 4% overnight, to open April 24 at about $176 per share. That’s a market cap of almost $50 billion for a company whose revenue for the year ending in January was $623 million. Revenue for the April quarter is estimated at $208 million.
As with Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA) before it, this is another case of a short squeeze going to the Moon. About 9 million shares are now held short on a stock with daily trading volume of 22 million shares.
You can trade that, but you don’t invest in it, unless you like losing money.
There’s no doubt that Zoom’s ease of use and ad-based business model is wildly popular right now. CEO Eric Yuan said Zoom had 300 million active users on April 23, up from 200 million April 1. He said this during a webinar held to talk about the app’s security issues.
Zoom has its own New Yorker profile, headlined “embracing the chaotic side of Zoom“.While rivals like Microsoft (NASDAQ:MSFT) Teams and Alphabet’s (NASDAQ:GOOGL) Google Meet are pitched as business tools, Zoom is the videoconferencing app even grandma can use.
It’s nice that Otter.ai now lets you transcribe and annotate a Zoom meeting, but that’s not the Zoom market. Much of Zoom’s use is purely social. It’s a modern party line.
Salesforce.com (NYSE:CRM) put $100 million into Zoom at its IPO last year, at $36 per share. It might have been the start of a buyout. But that $100 million is now $500 million. Dropbox (NASDAQ:DBX) and Atlassian (NASDAQ:TEAM) are also sitting on big profits, not from acting as venture capitalists but simply as IPO investors. It’s like Jeff Bezos winning the Powerball.
Security Problems are Just the Start
The problem with being a fad is that you can never be that hot again. It’s impossible to live up to this level of hype.
Zoom has tried to respond by boosting security. That’s the story CEO Yuan wanted to tell when he let out the 300 million user figure. But the media is on the hunt for new vulnerabilities. For instance, Zoom meetings can live in the cloud even after they’re deleted.
For many corporate customers, it’s too late. Big companies like Bank of America (NYSE:BAC) are now openly rejecting Zoom. India has called Zoom unsafe and launched a contest to develop a local alternative.
Rivals are anxious to pounce. Verizon Communications (NYSE:VZ) has bought a small rival called BlueJeans. Microsoft is boosting Teams in computer media. Its Skype product is adapting some of Zoom’s features, like virtual backgrounds. Google Meet has adopted Zoom’s “Gallery View,” which looks like the old Hollywood Squares game.
Bottom Line on ZM Stock
Zoom has a huge lead in what will be a large market. But it’s easy to make a videoconferencing app. Competition is growing, niches are appearing. When the virus starts to clear ZM stock may be to 2020 what bitcoin was to 2017 or marijuana was to 2018.
In NFL terms, everyone loves Joe Burrow. No one wants Jameis Winston.
No matter how great it is, moreover, there’s no justification for Zoom’s valuation. Nothing is worth 50-80 times sales, even at the best of times. Zoom is not Elvis, it’s not The Beatles, it’s not Google or Facebook (NASDAQ:FB). The stock market is down by 15% and vulnerable to a crash at that level. You can buy great stocks at reasonable valuations. Some are still paying dividends.
Zoom is a day trade, a game of dodgeball with the shorts.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in FB and MSFT.