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Zoom Video Is Punching Above Its Weight And Can't Sustain This Lofty Valuation

Kevin George profile picture
Kevin George


  • The end of the virus means the end of solutions rallies.
  • Zoom’s long-term growth strategy has just been steamrolled.
  • Transitory Effects of the Virus will disappear fast.
  • The technical picture supports a correction.
  • Looking for more stock ideas like this one? Get them exclusively at Global Markets Playbook. Get started today »

I advised my subscribers that Zoom Media (NASDAQ:ZM) was looking like it had reached a high and the stock has since dropped. In this article I discuss the reasons why I see it falling further.

The end of the virus means the end of solutions rallies

The spread of the Coronavirus has led to trigger-happy investors looking to jump on the next game-changer. Stocks involved in vaccines, testing kits, and food delivery have been among the winners, but as the virus starts to fade into history, so will extreme valuations.

It is hard to find a loftier big name valuation in the market than Zoom right now. The video-conferencing app company is now trading at a price-to-sales of 55 times (it was 63 just days ago). For a simple comparison, Apple trades at 4.7x sales and AMD, which saw a 50% Q-on-Q sales boost trades at 8.6x.

Zoom currently has a low institutional ownership level at 49%, which is maybe a sign that professional investors are happy to sit out and insider transactions in the last 6 months are showing a -74% change.

Positives for the company are a high gross margin of 81.5%, a 3.3 quick ratio and the fact that the company is actually earning, although with an EPS of $0.09 which is expected to hit $0.58 next year, the P/E ratio is currently 240 times.

It is clear that the company is being valued for its growth prospects but I feel that this is being exaggerated.

Zoom’s long-term growth strategy has just been steamrolled

Zoom sold off recently when it was noted that Facebook (FB) were to begin challenging the company by launching a host of new video messaging and livestreaming features on its platform to take advantage of the surge in usage created by

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This article was written by

Kevin George profile picture
Author of "The Stock Market is Easy - How to Avoid the Pitfalls of the Average Investor".I am an active trader in stocks, FX and commodities with over 15 years' market experience. I hold a master's degree in finance and have developed a strong skill base in technical analysis.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (67)

Richard Saintvilus profile picture
Zoom is in a weigh class of its own.
Everyone hates Skype. Google duo is just another obvious google brand product (yuck, not everyone wants that), nobody wants to use Facebook for video chats, the ‘just video conferencing’ element is a marketing plus, and I’d wager most video chatting is social and doesn’t require super high security. That’s said, they’ll fix the security issues, and once they plug-in with slack or another working platform, it’ll be game over for the affoemtioned competitors.
Everyone loved Skype 10 years ago. That's what you said in 2020.
@Say My Name Until the new kid comes in town playing the same trick
My workplace uses MS Teams. Security and integration.

Citizen Labs and University of Toronto found issues with both encryption and decryption (decryption keys from China) as well as where the data was sent (China). That was a debacle on the part of Zoom. Once trust is lost, it becomes extremely difficult to regain it.
Richard Saintvilus profile picture
@Entreri -

"Once trust is lost, it becomes extremely difficult to regain it."

Apparently, no one told Zoom how hard it was to regain trust. It took them them 30 days: seekingalpha.com/...

Buy Zoom, hold Zoom, accumulate more on the dips.

According to this recent new MS Teams was hacked on a regular basis for the last 5 years because of a security hole that allowed to take over your whole account. Including your files and chat history.


I assume now your whole IT will switch to Slack. Cause you know, once trust is lost, it is extremely difficult to regain it.
Ramy Taraboulsi, CFA profile picture
And, Slack is licensing Zoom...
Zoom is doomed and has no way to pivot or expand. Sorry, but there is no stickiness or network effect. Businesses, hospitals, universities can simply decree what they will use and everyone will flip right to it. There is no revenue to be found in the home use arena for families and friends to just chat.
Kevin George profile picture
That's what I've seen. Homes are using it as an option for a lockdown quiz but there is no monetization.
If you think Zoom will be used long term in healthcare you are incredibly wrong. First, the technology is not complicated. Second, healthcare solutions are already integrating this feature. My hospital system, one of the largest in the US has a web based patient portal that also launches video telehealth appointments and IT IS NOT ZOOM. It is a simple, proprietary program.
Our entire university uses Google and also Zoom. Interestingly, the new feature on everyone's university email are two buttons "Start a Meeting" and "Join a Meeting."

Most of my students prefer Google's offering over Zoom. Some of my younger colleagues are now using this much more often as well vs Zoom. Works well with the rest of GSuite. I do like Zoom, though I do wonder how they survive longer term with Microsoft and Google essentially creating the same options and making them much more integrated.

Oh and Zoom's valuation is pretty bubbly. Just look at revenue/market cap. This could easily move to $200 or $300, so if you are short be careful. Longer term, I don't see how this valuation stays.
Kevin George profile picture
Thanks for the Google info. Good to hear from users.
Richard Saintvilus profile picture
The news arrived somewhat under the radar, but they are notable additions to Zoom. The company announced adding Lieutenant General H.R. McMaster as an independent board director, effective today. McMaster said his goal was to help the company become “the world’s most secure video communications platform.”

Zoom also appointed Josh Kallmer as its Head of Global Public Policy and Government Relations, effective May 26. Kallmer most recently served as EVP for Policy at the Information Technology Industry Council, which advocates for the tech sector. He oversaw ITI's policy operations, focusing on issues including privacy, cybersecurity and trade.

He previously worked for the Office of the U.S. Trade Representative under the George W. Bush and Obama administrations. These moves puts zoom in a much stronger position to gain trust with Washington policy makers and ultimately sustain its user growth rate. It also opens doors wider for the company to innovate and/shift its business in areas that allows it to monetize its users without all of the scrutiny.

Zoom stock will be at $200 by the end of June.
Kevin George profile picture
Trust and former Presidents don't matter. Valuations do.
Richard Saintvilus profile picture
@Kevin George -

Wondering what weight class would you assign to Zoom now? Do you still expect the stock to fall to $70?
Kevin George profile picture
I wouldn't be surprised if it did. Once the one-time virus effects disappear.
Zoom is doomed. The company has no plan to monetize its users as soon as they try people will leave in droves their competition is giving away the service for free. What kind of a future is this?
Kevin George profile picture
True. The media focus on users but the majority won't pay. It's a fad with no moat at a high valuation.
Where did you get that ZM added 2.3m DAUs in February? OR the 1.99 in 2019? The article you linked only talks about Skype’s DAUs.
Also your analysis is garbage. You don’t even look at the Phones or Rooms opportunity. And you fail to recognize their eventual entrance into the uCaaS market. It’s like you haven’t even read their K, yet somehow come to a view on the stock
Who still uses Skype after 20 years? This is at least 30 years ahead of itself
Ramy Taraboulsi, CFA profile picture
I still use Skype for "chatting" one-on-one with my colleagues. Its video stinks, and I rarely use it...
Cyan007 profile picture
The problem with Zoom? It’s not an eco-system that keeps me locked into it. Eventually other large-scale video conferencing will be as easy and clean to use.

If you belong to Facebook’s eco-system, you’ll use theirs with your friends. Google, MS, whatever you belong to you’ll simply go along with it. In time there won’t be anything that ‘keeps’ users on Zoom unlike the other platforms. Cisco is/was in the same boat, I’ve used their products for years. I had no issues just moving to Zoom and not worrying about being involved with Cisco anymore. Just like it’ll be easy to move from Zoom to the next one when the time comes.
Yeah, just like all those users abandoned Google for Bing.
Or DuckDuckGo. After the security and privacy concerns became clear, obviously everyone left google.

Google failed because they did not have any moat. Switching is very easy. Also, no business customers as privacy and security are the most important for businesses, even before convenience and business value.

Zoom will fail as did google

Encryption/decryption keys from China and data was routed through China. Canadian Citizen Labs and University of Toronto uncovered this.

The Communist regime in China likely has access to all those videos and requires no effort at decryption.
the article is way wrong on one thing. the new Facebook app will challenge consumer apps like HouseParty or LINE, that connect friends using video. zero chance all these B2B company meetings would even remotely consider using facebook for work meetings.
Kevin George profile picture
The point was that FB and Google didn't see this as an avenue worth chasing until the CV outbreak. Now they might want to have a piece of the pie.
cma profile picture
Morgan Stanley has an Equal-Weight rating on Zoom with a price target of $105.
The firm does not see Zoom offsetting its free use by selling ads or user data. The chance to monetize all those new users "in the long term remains slim."
MS is one of the "sponsors" of Zoom. I kid you not. There's a lot not to like about ZM.
Ramy Taraboulsi, CFA profile picture
Is that the same Morgan Stanley that had a price target of $230 for Tesla last July? seekingalpha.com/...
cma profile picture
No, that is a different one :)
But I will say one thing for you, Ramy. You put your money where you mouth is.
Everything that I need to know, is that MS uses Zoom to talk with their clients and not Facebook.
mxchen profile picture
First of all, I'm no where near an analyst or technician.

I'd agree Zoom is punching above its weight grade currently. However, Zoom does not opt to do it. They just provide the service to most consumers and students for free during the pandemic, not even try to monetize through ad. That's huge goodwill if the company is run properly. We don't have idea what area they may enter into in future, and how much the goodwill will play a part in it.

Many comments already cover the superiority of Zoom's product. I'd like to add that Eric Yuan was voted as (one of) the best CEO of American companies (at least in 2018 as I know, and should be in a few other years as well). Don't underestimate how an excellent leader can do to develop a great company - remember those years when Mark Zuckberg was highly approved by FB employees?

Is Zoom over-valued at current price? Yes. Can Zoom grow itself to be beyond current valuation? Probably. At least there's a chance.

Should we buy the stock? It depends. For people highly speculative or love high growth potential stocks, maybe.

Last thing, I don't own any position on $ZM.
I like this analysis.
People very often dive into the analysis of some speculative indicators that disclose little.

Management of the company was always the main criteria for success. If we think of any famous successful company today it's not because of their original product but because of their leaders who's execution was simply unmatched.

And so far I liked how Zoom CEO and the management has handled the problems.
Sorry, but there is no stickiness or network effect. Businesses, hospitals, universities can simply decree what they will use and everyone will flip right to it. There is no revenue to be found in the home use arena for families and friends to just chat.
Zoom's competitors use zoom for their own employees. That sums it up.
Ramy Taraboulsi, CFA profile picture
Of course. This is a logical step to take. You should always try to use the software of a superior competitive product to learn from them and try to copy them...
Comparing Zoom to Apple and AMD is ludicrous. Both of those companies are predominantly hardware companies. Selling widgets is a completely different ball game. May as well compare Zoom to Ford.

But setting that aside, let's look at some of your fundamental arguments. The virus is not going to vanish. Even once a vaccine becomes available (9 months, best, most optimistic projections) how long will it take to inoculate a significant portion of the population? How effective will it be (the flu vaccine for example is about 45% effective)? And even getting past those hurdles, do you really think business will revert to travel? I sincerely doubt it. I worked at a Fortune 50 company before I retired 10 years ago and there was already a significant effort to curtail travel and use Webex (the company standard at the time) which only supported desktop sharing, no video and no audio. And it was not all that reliable. Why would any company say OK, time to increase costs and spend a bundle on unnecessary travel now that everyone is used to video conferencing. Ain't gonna happen.

Competition? Yes, there is some, but Facebook? You got to be joking. Can you think of any enterprise that entrust Zuck with their video conferencing information? Yeah, FB might peel off some of those free users. Big loss. Google? Not nearly as good and not really free. Skype? It has already lost the game, users have abandoned it long ago. I'm not suggesting that Zoom is without competition, They have real competitors, Blue Jeans and maybe a couple of others, but they're all paying catch up from positions far back in the race.

Security issues? Blown way out of proportion. Some of the security problems weren't really problems at all. Zoom set a number of defaults that were geared for the corporate user. When they had an explosion of free users, the vast majority of them never reviewed and reset the defaults that would have addressed those issues. But yes, there were some real security issues. Eric Juan has been candid about accepting responsibility for them and has attacked most of them already. More importantly, he has altered the approach to development such that security is always at the forefront of development activities. He has also reset his relationship with the security community (which was somewhat adversarial in the past). Zoom is now dedicated to working with and responding to issues.

But, let's face it. No product is completely secure. Not Zoom and not any of their competitors. The ideal security would be such that it is completely transparent and creates zero inhibition for the authorized user while also being completely opaque and impossible to penetrate by the unauthorized attacker. This is of course impossible to achieve. Security remains a trade off, and all the requisite security will never be provided by any single product. Security is only achieved by a concert of user authorization, endpoint protection, network protection, content protection, etc.

And finally, Zoom is the beneficiary of a dominant network effect. People use Zoom because it has spread like wildfire and everyone else is using it. Why would you opt for some alternate product that at best is comparable with respect to reliability, functionality and ease of use while everyone else is using Zoom. "Zoom" has already become a verb. It dominates and will continue to dominate by virtue of the fact that it is already dominant.

But good luck with that short that you are planning on taking out in the next 72 hours (OK, you didn't say that, just a speculation on my behalf) . . .
use zoom and try using others. As an active user of the service, I would say that it is superb, other big names are sometimes even not working. moreover many of companies-client ecosystems have already found themselves in a smooth flow on Zoom, they are not going to switch to other services so easily having made comfortable with the given platform.

On top of that, there is something in the name itself, it is catchy, it's easy and it's happening.
adbrothers profile picture
I agree that zoom (zm) is way over valued but I still had to take a position recently. I have used ZM and Google , and zm is just a lot better. Google keeps dropping off people to where people stopped using the video portion, that seems to help.

Nobody knows when the virus is going to be solved and how soon people will be travelling so everyone will be zooming or using some sort of video conferencing solution.

I agree that it is hard to tell who will win but this next quarter will be huge. Just how much earnings will go up is hard to tell, but I want a piece of this, although a small piece. It's hard to not invest in something that has only been on the market for such a short time and already became a verb.

Thanks for the article.
The virus is not going away any time soon and the huge short position ( over 50% of the float) plus no capital requirements unlike Tesla means that ZM will be around to torture the short sellers for quite some time.
There are many companies providing the same services that ZOOM. Significant competition does not increase margins.
Ramy Taraboulsi, CFA profile picture
Thanks for the article.

I think that it is very important for anyone who writes about Zoom (or any other product, as a matter of fact) to use the product and conduct a functional and non-functional requirement analysis against the competition.

Just relying on technical factors is a recipe for disaster for cult stocks like Zoom, Tesla and Shopify. Even fundamental analysis is very risky and whatever adjustments made to the financials are very hard to provide an estimate to the value of the stock.

I personally think that Zoom will continue going up, but it is hard to set a price target for it, as I expect it to go above any reasonable technical or fundamental analysis. Of course, we can agree to disagree.

As a disclosure, I am putting my money where my mouth is, and I am long on Zoom...

Thanks again for a well-prepared report...
Hey @Ramy Taraboulsi, CFA
I am watching Zoom for some time now, sometimes hold long when it makes sense.

What I have observed, is that Zm over the past two months hold very strong correlation with RNG - basically doubling it's valuation. Have you tried to perform a comparative valuation of Zm with other stocks?
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