Shares of Zoom Video Communications (ZM -0.68%) have been on an absolute tear since it went public last year. Its been just over a year since the collaboration company came up with its IPO, priced at $36 per share, on April 18, 2019. At the time of writing, the stock is trading at $158.80, which is over 300% higher than its IPO price.
Zoom Video stock has crushed peers and broader indexes since it began trading on the NASDAQ. Since Zoom Video's market debut, the Dow Jones Industrial Index (DJIA) is down 10.5%, while the S&P 500 has fallen 0.5%.
So, why am I bearish on a stock that has easily outpaced the equity market?
Zoom Video experienced a massive surge in daily active users
The COVID-19 pandemic has inflicted a great deal of pain on the global populace as well as investors. The dreaded virus has now infected over 3 million people and caused 200,000+ deaths worldwide. Governments have announced countrywide lockdowns and shut their borders. This has resulted in business closures and a massive decline in consumer spending, completely decimating most industries.
Global economies have come to a standstill, and the travel and tourism industry is completely dead. However, a majority of the global workforce is now working from home, and this trend has increased the demand for Zoom Video's collaboration tools at a significant pace.
Image source: Getty Images.
One report from The Verge stated that Zoom confirmed its daily users have reached 300 million, up from 200 million in early April and just 10 million in December 2019. We can see why the stock has zoomed to its record high this year.
While the massive surge in users has sent Zoom Video Communications stock sky-high, the company is grappling with security issues. There have been multiple reports stating Zoom's default settings were less than secure.
Several schools and education institutions were holding classes online, which meant underage students were exposed to malicious and harmful content. Pranksters used to disrupt meetings, and this unwanted intrusion came to be known as Zoom-bombing. Large enterprises including tech giants such as Alphabet's Google have since stopped using Zoom applications to conduct meetings.
Zoom did not forecast this sudden uptick in users, and it released a statement acknowledging privacy issues. Zoom stated:
For the past several weeks, supporting this influx of users has been a tremendous undertaking and our sole focus. We have strived to provide you with uninterrupted service and the same user-friendly experience that has made Zoom the video-conferencing platform of choice for enterprises around the world, while also ensuring platform safety, privacy, and security.
It added, "However, we recognize that we have fallen short of the community's -- and our own -- privacy and security expectations. For that, I am deeply sorry, and I want to share what we are doing about it."
These security concerns might keep investors wary despite Zoom taking several steps to make its platform safe.
Zoom will find it difficult to sustain user growth
Zoom is unlikely to maintain its robust daily user growth in the coming months. The COVID-19 pandemic is likely to be a near-term headwind, which means people will start going back into offices and schools once normalcy resumes.
Another reason is that Zoom competes with several other technology giants in the collaboration segment, including Microsoft's Teams and Cisco's Webex. The other top players include LogMeIn, Adobe, and Google.
Earlier this month, telecom giant Verizon announced that it's looking to acquire BlueJeans Network, another enterprise-facing video conferencing platform. The Wall Street Journal reported that Verizon will pay around $500 million for the acquisition. BlueJeans claims several business behemoths as its customers, including Intuit, Facebook, and ADP.
On April 24, social media giant Facebook launched Facebook Rooms, which is a video live-chat service. Facebook Rooms will simultaneously allow up to 50 people to conduct calls, and it can be accessed from all its social media platforms. Facebook already has an engaged user base at the global level, and it may be successful in converting them into video conferencing customers.
Several of these companies are much larger than Zoom and have enough resources to spend on customer acquisition or marketing. A majority of them have multiple business segments and can easily convert customers of legacy businesses into paying customers for their new portfolio of products.
We have seen Zoom's explosive growth in daily active users, but most of them are not paying subscribers. This means Zoom will have to successfully monetize a portion of its free subscribers into paid ones to keep investors interested and ensure top-line growth.
Zoom's valuation is sky-high
Zoom's amazing run in the last year has sent its valuation skyrocketing. Analysts expect company sales to grow by 49.6% to $931.4 million in fiscal 2021. This means Zoom is trading at a forward price to sales multiple of 47.6. Its forward price to earnings multiple is also high at 365.
Comparatively, high-growth tech stocks such as Roku, Alteryx, Okta and The Trade Desk are trading at a forward price to sales ratios of 10.1, 13.6, 24.6 and 15.3 respectively, at the time of writing.
The verdict
While growth stocks tend to trade at a premium, Zoom's valuations are difficult to sustain over time. Zoom Video Communications is a top player in a high growth market. However, I just think that the stock will move lower in the next few months given its rising competition, high valuation, and unsustainable growth rates.
