Should Zoom Investors Be Worried as Its Customers Go Back to the Office?

Shareholders of Zoom Video Communications (NASDAQ: ZM) have enjoyed a tremendous run over the past year. Even with the recent pullback, the stock has more than doubled in the past year. But investors may be on pins and needles about what's next for the company. With businesses looking to get back in the office for in-person meetings, will Zoom be left behind like the pet rock craze from my childhood? On a Fool Live episode recorded on March 31, Fool contributors Toby Bordelon, Brian Feroldi, and Brian Withers discuss what the future could look like for this video conferencing software specialist.

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Toby Bordelon: Let's look at Zoom. This is a favorite of many people, I think. I mean, would we even be doing this if Zoom didn't exist? I don't know. [laughs] Who knows. Everyone watching us today is a user in some way of Zoom. This has been big, especially in the pandemic. Let's look at the numbers real quick, and what they've done.

Revenue in 2020, fiscal year 2021, because their fiscal year ends in January. They call this 2021, but it's basically most of 2020. Revenue up 326% to $2.6 billion. That is insane; $2.6 billion, 326% increase. That is just remarkable. I mean, it's almost so mind-boggling that you wonder, is that real? Is that a typo? But no, that's what they did. They're tamping down expectations, they're obviously not targeting that level of growth for next year. They're guiding for about roughly $3.8 billion total revenue for the next fiscal year. Still a big increase, but not on the percentage basis we've seen before.

Stock is down, stock is down a lot. They were pushing $600 late last year, now it's just a little over $300, roughly $325 I think I saw most recently. But again, like Appian that we talked about earlier, this has been more than a double over the year. So, I don't think you're crying too much if you've been a shareholder for a year or more.

One [other] piece of news. They are now the official partner of Formula 1. This is them getting into that branded sponsorship game you see some companies dealing with sports events and sports teams a lot. I wonder if that's going to pay off. You get your name out there, but is there anyone in the world who doesn't actually know who and what Zoom is right now? I don't know, so I'm not sure how necessary that is. It's cool though. It is cool.

What am I watching going forward? I want to see the year-over-year revenue growth for Q1 and Q2, especially Q2 this coming year. Can they hit their targets? The pandemic obviously did a big boost to them, but they're not hitting the same percentage growth. So I'm just curious to see what that percentage growth is and whether we think this is going to be sustainable. Growth is good if we started to see people canceling, maybe they no longer need Zoom, that would be a big issue. That's definitely something to watch.

Brian Withers: Yeah, Toby, I certainly think they're going to see some fall-off, especially from consumer accounts and maybe small companies who just had to adopt something before they get back into the office. But one other thing I think that's going for Zoom is something called Zoom Rooms. It's a conference room solution that's cloud-based using commodity hardware.

If you've been in the offices where they have these video conferencing setups. In the past, these were big, huge wiring expeditions and you had to have specific products. Starting at like five figures to get just one room set up, and then you could only talk to one other room. But Zoom has certainly turned this on its head. With $600 to maybe even $1,000 for some of the little more expensive things, you can set this stuff up. You buy a Zoom Room kit, it comes, you plug it together, you stick the TV at the end of the room and you log into your account, and you're going.

What I really, really like about this product is that the software makes it so that everyone, not just the people in the conference room, are all on equal footing. When I was in corporate and we were doing these conference calls, one or two people were not in the room, they were always just forgotten and missed out and they'd pipe in late and whatever. But I think companies are going to have to deal with staff and there's going to be like half the people that aren't in the room and I think Zoom Room is a great solution. It's very affordable. It'll allow people to ramp up their offices over a period of time rather than forking out a huge chunk of money right away. I think that's going to help them make their numbers. That will be certainly something to watch.

Bordelon: That's going to put them squarely in competition with Cisco, on that level. Pushing into the enterprise space, pushing into the physical space more. It's going to be curious to see how that works out here. Cisco has got a bunch of infrastructure with sales teams and these corporate contracts and relationships. We'll see if Zoom can make any inroads there and how quickly they grow in that space.

Withers: I'm betting my money on Eric Yuan. He used to be part of Cisco and he left because he couldn't get them to pay attention to the product. What goes around, comes around, so look out. I think that will be fun.

Brian Feroldi: Similar story at Arista [Networks], right? Wasn't that a whole bunch of people from, I'm pretty sure it was Cisco. I remember hearing Jayshree Ullal, the CEO, talk about leaving, and it was like their motto at Cisco is, "We suck a little bit less than yesterday." [laughs] So like you, I'm betting on Eric Yuan. [laughs]

Brian Feroldi owns shares of Appian. Brian Withers owns shares of Zoom Video Communications. Toby Bordelon owns shares of Appian and Arista Networks and has the following options: long January 2022 $47.5 calls on Cisco Systems, short January 2022 $45.0 puts on Cisco Systems, and short June 2021 $50.0 calls on Cisco Systems. The Motley Fool owns shares of and recommends Appian, Arista Networks, and Zoom Video Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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