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Zoom Stock is down BIG. Here's why I'm buying now! | Episode #14 - YouTube
Channel: Brian Feroldi
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zoom has put its investors on a roller coaster聽
ride since it came public in 2019. Demand from聽聽
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the pandemic caused the stock to absolutely聽
skyrocket in 2020. Yet shares are currently聽聽
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down 82% from their all-time high as interest聽
in the stock has all but evaporated. Despite聽聽
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that craziness we think this is still a very聽
high-quality business with a bright future ahead聽聽
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here's why we'll be buying shares of zoom today my聽
name is Brian Feroldi and my name is Brian Stoffel
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thanks to commonstock for supporting today's video聽
as the time is recording i'm a shareholder of zoom聽聽
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and i also own shares of zoom so let's talk about聽
the company today it is valued at $30 billion聽聽
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although at one point it was worth over $160聽
billion and when you look for the company look聽聽
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under the ticker ZM not z-o-o-m which is not聽
the same company zoom's mission is to make聽聽
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video communications frictionless and secure this聽
is simple inspirational and optional this company聽聽
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really understands mission statements and聽
even though zoom has become a household name聽聽
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and a verb over the past two years we'll just聽
reiterate that it offers a unified communications聽聽
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platform primarily video communications聽
that any individual or business can use聽聽
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zoom's business model is called unified聽
communications as a service very similar to聽聽
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a software as a service business model customers聽
pay a monthly or annual subscription fee to access聽聽
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the company's features zoom's key customer base聽
is enterprise and large businesses one of the聽聽
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key metrics for investors to watch is the net聽
dollar expansion rate for customers that spend聽聽
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over a hundred thousand dollars or more each year聽
on zoom's platform this figure recently came in聽聽
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at 123% which shows just how sticky the platform聽
is now customer acquisition costs come in at a聽聽
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medium level eating up about 35% percent of the聽
company's gross profit customer demand is robust聽聽
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and the vast majority of revenue is recurring but聽
does zoom have a moat we believe the answer is聽聽
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yes first we think the company benefits from the聽
network effect we believe that this network effect聽聽
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is very low and small but once a user and company聽
starts using it all other people in that company聽聽
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need to also use zoom in order to communicate聽
this creates a localized network effect that聽聽
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does provide a barrier more importantly we believe聽
that zoom has high ish switching costs now this is聽聽
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not for individuals who don't really face any pain聽
in switching to a different video provider however聽聽
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large corporations would experience significant聽
switching costs if they tried to do so we also聽聽
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believe that zoom has become a category leader and聽
that its brand name is extremely strong so much so聽聽
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that it's become a verb you zoom somebody else we聽
think that that very strong brand name that's been聽聽
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hard won over the last couple years will serve聽
this company in the future take all this into聽聽
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consideration and we believe at worst zoom's mode聽
is stable and at best it is expanding turning the聽聽
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company's financials they are jaw-droppingly聽
good zoom's revenue has grown at a 45% percent聽聽
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compounded in a growth rate over the last聽
three years its gross margin is over 75% and聽聽
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this company has been highly profitable for many聽
years now the same can be said for the company's聽聽
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free cash flow which has been over a billion聽
dollars for a number of years its balance sheet聽聽
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is pristine and it gets great returns on capital聽
turning to management zoom is currently led and聽聽
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founded by the same person ceo eric wan who left聽
cisco systems because he was so frustrated with聽聽
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video communications technology at the time that聽
he decided to invent his own company to compete聽聽
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not only has he created a powerful tool but he's聽
created a powerful workplace where employees give聽聽
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very high marks and insider ownership is聽
very high as well turning to potential聽聽
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we think that zoom's optionality is an underrated聽
aspect of this company everybody knows that this聽聽
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company has zoom for video communications but聽
they've also launched other features such as聽聽
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chat zoom rooms webinars and even a marketplace聽
that makes this company have more optionality than聽聽
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meets the eye now when we turn to the company's聽
operating leverage ahead we have to keep this in聽聽
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mind the company was optimized for profits in聽
2020 and early 2021 because it couldn't spend聽聽
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fast enough given its huge boost in revenue聽
since then the operating leverage has come聽聽
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down which means that there is room to grow in聽
the future the market for communications tools聽聽
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like zoom provides is absolutely massive clocking聽
in at more than 80 billion dollars and growing聽聽
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zoom has already captured about five percent聽
of that number but the market itself continues聽聽
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to expand and while zoom has made a number of聽
smaller acquisitions lately the vast majority聽聽
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of this company's growth is organic so how is聽
zoom done for investors well despite putting聽聽
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them on an unbelievable roller coaster ride聽
over the last two years this company is still聽聽
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outperforming the market since it came public聽
moreover the company has a habit of exceeding聽聽
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wall street's estimates having done so four聽
out of the last four times in the bottom line聽聽
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and how about this for a small and growing company聽
not only does the company not really have any debt聽聽
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to pay down but it is buying back shares so far so聽
good but let's talk about the risk because there聽聽
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are a few to keep in mind first and foremost聽
is the competition the market is absolutely聽聽
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littered with video communications tools like聽
those that zoom provides and the company has聽聽
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been facing off against competition such as聽
cisco systems microsoft google apple and many聽聽
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many others so there are plenty of alternatives聽
here that investors need to be aware of when聽聽
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we look at the dilution rate for zoom we need聽
to take its history into consideration it was聽聽
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diluting shareholders for its first few years聽
as a public company but it has generated so聽聽
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much cash that it's now repurchasing those shares聽
so dilution is less of a problem moving forward聽聽
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finally there's valuation while the stock is聽
currently down more than 80 percent from its聽聽
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all-time highs shares can't be called classically聽
cheap it's much more reasonable than has been聽聽
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in the past but they still could be considered聽
slightly overvalued despite falling more than 80聽聽
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from its high it's hard to call zoom stop cheap聽
on an absolute basis we'll have more to say on聽聽
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valuation just a little bit let's first turn聽
to how the company did during its first quarter聽聽
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revenue came in at about 1.1 billion dollars which聽
was 12 higher than last year it slightly beat wall聽聽
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street estimates and met its own guide zoom's聽
earnings per share actually fell 22 to a dollar聽聽
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three on a gap basis that exceeded wall street's聽
estimates and management's guidance the company's聽聽
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margins were solid across the board during the聽
quarter with its net margin staying above 10聽聽
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and while net income did fall year over year on a聽
gaap basis free cash flow actually increased and聽聽
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the balance sheet remains bulletproof looking聽
ahead management's top-line guidance of nine聽聽
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percent growth outpaced wall street's expectations聽
while on the bottom line 91 cents per share while聽聽
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down 31 from last year was also ahead of what聽
wall street was expecting management is guiding聽聽
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for full-year revenue growth of about 11 that is聽
slightly behind what wall street was expecting聽聽
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the bottom line is expected to contract due to聽
higher spending this year although that number聽聽
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is coming in ahead of what wall street was hoping聽
for so what should we watch as shareholders moving聽聽
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forward the first thing we'll keep an eye on is聽
that net dollar expansion rate it tells us that聽聽
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the company is not only holding on to its big聽
customers but getting them to spend more second聽聽
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keep an eye on the number of customers are going聽
to spend at least a hundred thousand dollars on聽聽
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this platform each year this figure has continued聽
to move up and to the right for years and with new聽聽
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products on the market we want to see that trend聽
continue third watch gross margins those gross聽聽
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margins staying above 75 is important because聽
it means that companies believe that they're聽聽
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getting something from zoom that they can't get聽
anywhere else and fourth watch free cash flow聽聽
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while earnings are expected to be slightly lumpy聽
free cash flow never lies and this figure has been聽聽
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trending in the right direction for years we want聽
to see that continue as we said earlier the moat聽聽
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for this company at worst is stable and at best is聽
definitely widening and the thesis is very much on聽聽
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track we recently reran this company through our聽
investing frameworks and the numbers came back聽聽
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very well i give this company an 82 on my quality聽
score which is well into my high quality business聽聽
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category and i gave the company an 11 which is聽
knocking on the door of anti-fragility turning聽聽
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to valuation we think that zoom has reached the聽
maturity phase so that the price to earnings聽聽
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ratio is a meaningful number for investors to look聽
at that means that management is optimizing its聽聽
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income statement for maximal net income so let's聽
check out on a couple evaluation multiples to see聽聽
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where zoom stands today first we'll look at the聽
price to sales ratio zoom is currently trading at聽聽
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7.3 times this is the lowest valuation on record聽
using this metric next let's look at the company's聽聽
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gross profit which exploded after the pandemic and聽
today sits over three billion dollars we can then聽聽
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take that number and the company's market cap to聽
calculate that has a price to gross profit ratio聽聽
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of around nine that's high on absolute terms but聽
not that bad given zoom's profile next let's look聽聽
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at the price to free cash flow ratio this number聽
clocked in at below 21 which is again the lowest聽聽
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on record and if we look at the company's price to聽
earnings ratio a 25 while not considered cheap is聽聽
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definitely the lowest it's ever been finally let's聽
take a look at the price to forward earnings ratio聽聽
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this figure is actually 27 which is above the聽
trailing p e ratio that indicates that wall street聽聽
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believes that earnings next year are about to聽
decline however in the long term we believe that聽聽
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this company's profits on a net income basis will聽
continue to move higher so there you go that's why聽聽
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we will be buying shares of zoom for our portfolio聽
that we share on common stock we'll be posting all聽聽
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these slides on common stock we encourage you聽
to visit us there and push back on anything that聽聽
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we've said in fact we'll be selecting one comment聽
on common stock as the most insightful and common聽聽
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stock will be rewarding 100 to whoever provides聽
that comment we wanted to give a shout out to聽聽
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leandro providing the top comment on our video on聽
adobe which provided lots of color about adobe's聽聽
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moat common stock will be sending leander 100 for聽
that comment if you'd like a chance to win make聽聽
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sure you head on over to common stock and leave a聽
comment we hope this video is useful brian's out
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