Zoom Communications (Nasdaq: ZM) has been one of the big winners from the coronavirus shutdown. Its product is perfectly positioned for this moment in time. During the past month and a half, it's estimated that 2 to 3 million people are signing up for the service per day. This is the type of exponential growth that has been experienced by many of the big winners in consumer-facing tech like Snap (Nasdaq: SNAP) or Facebook (Nasdaq: FB) in their early stages.
It's quite impressive that Zoom has been able to handle this growth without any hiccups in terms of slow or interrupted service. Companies and schools are conducting meetings and classes online. Although use of the service will certainly drop off when the economy normalizes, it will displace a chunk of business travel and face-to-face meetings. The company's product has become integrated into people's lives in a meaningful way due to its user interface and experience.
Additionally, the company has carved out a dominant market share against more deep-pocketed competitors like Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG), and Microsoft (Nasdaq: MSFT) who had similar offerings but were unable to capitalize on this opportunity. Now, Facebook (Nasdaq: FB) is launching its competitor to Zoom.
Facebook's Competitor
Facebook is notorious for copying features from competitors and then trying to make it better or outright buying them. Its video service is called Messenger Rooms which lets up to 50 people join for free for an unlimited time. In comparison, Zoom allows up to 100 people for 40 minutes for free.
Zoom was created for professional video conferencing, but it's been adopted for all types of uses including classes, socializing, and even parties. Currently, Facebook is mostly geared towards socializing and is built on top of the Messenger app. Given its massive user base, it's likely that it will take some market share, but it's unlikely that Zoom will lose its dominant position given its ubiquity and switching-costs. Additionally, Zoom also offers features like video-recording and transcription that are valuable for professionals and education that aren't yet available for Facebook.
Stock Price
Zoom's stock is up more than 100% since the beginning of the year. It's quite expensive by traditional valuation given its nearly $45 billion market cap and $620 million in revenue over the past year. However, over the past decade, it's clear that valuation doesn't matter for tech companies that are growing at Zoom's scale with 75% revenue growth and 82% gross margins. And, these figures are before taking into the impact of the coronavirus shutdown.
Zoom's stock is almost a binary bet. The market for video conferencing is only going to grow with the coronavirus an accelerant of that trend. If in five or ten years, it's the dominant company, then the stock is a buy. And if it fails, then stockholders at these levels will suffer losses. Consumer-facing tech companies tend to be winner-take-all like Google with Search or Facebook with social. They become like monopolies and benefit from network effects.
At one time, Google and Facebook were very expensive. However, these companies held onto their market share, their user base kept growing, and they managed to grow into their rich valuations. Google valiantly tried to claw back social from Facebook, but it failed as Facebook was too entrenched and its product was better. History may be repeating with Zoom and Facebook.