Zoom & lasting demand for video conferencing

Zoom stock rocketing over 40% the day after reporting Q2 earnings probably demonstrates both excess speculation and long-term demand for video conferencing.

 

Definition

Video conferencing is a technology that allows users in different locations to hold face-to-face meetings without having to move to a single location together. - Investopedia, May 2020.


The Story

The idea that the demand for video conferencing would just be a flash in the pan and over as soon as pandemic lockdown measures were eased just got proven to be very wrong.

 

169% sales growth in the first quarter was only the tip of the iceberg for Zoom (ticker ZM). For Q2, the firm just reported quadruple sales growth over last year and a colossal  tenfold increase in operating income. Importantly Zoom says it will keep its customers with its phone app and attract new big corporate clients in the coming quarters.

Speculation in the stock is running rampant because the story makes so much sense; it is a well- executed business for a suddenly heavily in-demand service in a crisis.

Demand for video conferencing continues to grow in a ‘new normal’ where more business and social interaction happens via video. However, other video conferencing stocks have fared well but not nearly as well as Zoom largely because they did not capture the imagination of investors or get the same level of attention from new users.

 

Chart

Video Conference shares vs. S&P 500 index (year-to-date)
zoom zm video conferencing

 

Risks

There are now two manifest risks in investing in Zoom and by extension other video conferencing shares.
1. The need for video conferencing should still drop when the pandemic passes and travel and face-to-face meetings return to some level of normality.
2. Zoom now has a forward PE ratio of 232, suggesting frothy valuations, especially compared to peers.

How to play it

Individual shares
Zoom - owned by Zoom Video Technologies (ZM)
RNG - RingCentral Rooms - owned by RingCentral
WORK - Slack - owned by Slack Technologies
MSFT - Teams - owned by Microsoft
TECHY - VooV - owned by Tencent
LOGM - GoToMeeting - owned by LogMeIn
CSCO - WebEx - owned by Cisco

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