Tyndall fund manager Felix Wintle is one of the handful of fund managers that holds a sizeable weighting in Zoom Video Communications, but the US equities investor admits he initially sat on the sidelines when the company IPO’d in April 2019 because he “didn’t really get video conferencing”.
Priced at $36 it raised $356.8m and surged 72% on its first day of trading, although it was the coronavirus lockdown, which caused workplaces to suddenly adopt remote working, that would really prompt the Silicon Valley stock to really rally.
The US tech stock is now trading at $156 with a market cap of $41bn.
Baillie Gifford appears to have been the first asset manager within the Investment Association universe to have jumped on Zoom, getting in before the novel coronavirus had even been discovered, followed by Argonaut fund manager Barry Norris, who first initiated a position in November 2019.
Skype and Webex put on the back burner
Zoom’s profitability had prompted Wintle (pictured) to add it to his watchlist in December, when it was trading between $60 to $70. But he had reservations at the time that video conferencing “didn’t really work”.
“Skype’s been around forever. No one really uses Skype or maybe if you’ve got relatives in Aussie you might do a Skype call.” He also points also to Webex, which Cisco acquired in 2007, and is the former workplace of Zoom chief executive Eric Yuan.
“Video conferencing has always been that dog that never barked,” says Wintle. “It’s always been there and ought to be the end of airlines’ business travel but it’s just obviously hasn’t happened.”
It wasn’t until March that Wintle introduced a tactical position, which became a top-10 holding that month with a 4% weighting.
“If it bounces we’ll probably trim a little bit off because it is quite high beta so it’s not it’s not necessarily a stock that we’re going to want to have 4% in for a longer period of time because it will be volatile.”
Zoom’s quick leap from early adopter to mainstream app
Baillie Gifford confirms its £3bn American fund initiated a position in November 2019, which currently represents 2.6% of the portfolio, and that Scottish Mortgage also holds a position, albeit not in its top-10. Its allocation goes back even further with its interim report for the period ended September 2019 highlighting a 0.2% weighting.
Ben James, Baillie Gifford US equity specialist, says while growth rates for the video conferencing business will fade from the “100% plus” seen in the 2019 financial year, he still reckons it will sustain at least 30% growth through to 2025.
“While technical differentiators have helped Zoom establish a beachhead, what makes it special are a user-centric culture which has helped create a product that – unlike rivals – ‘just works’,” James says. Its quick leap from an ‘early adopter’ to ‘mainstream’ app feeds a network effect, he adds.
The Argonaut Absolute Alpha fund, managed by Norris, has a 5.5% long position as of March, while Argonaut European Alpha has a 5% allocation, according to FE Fundinfo.
Zoom has the potential to prove earnings estimates wrong
Wintle singles out three factors he likes about the company.
“One is it’s profitable, which is super unusual for newly-minted tech stocks. Second, the cost of customer acquisition has basically been zero because everybody’s talking about Zoom. Our neighbour’s got it, our granny’s got it.
“And the third thing is the customer numbers have gone from 10 million in December to 200 million today, which obviously is crazy. A lot of those are non-paying, but in terms of brand awareness and speed of growth of people that use the product it’s been pretty unparalleled.”
Allianz Technology Trust portfolio manager Walter Price also speaks highly of the stock. If Zoom keeps new users happy and retains them as customers, earnings estimates “will prove to be drastically low”, Price says.
“I think many companies are finding that [working from home] makes them more efficient, and they will incorporate it into their work processes. If Zoom executes this opportunity, it could be a very big and important company.”
Video conferencing company is too expensive for some equity managers
But not everyone is hooked on Zoom.
Schroders fund manager Simon Webber, who runs the Global Climate Change Equities strategy, does not hold the stock even though in March he issued a note highlighting the investment opportunity, and environmental benefits, in remote working software and video conferencing.
“It is quite possible that 2020 will mark the inflection point where the corporate sector realises that it can do more with less travel,” Webber said. “In that respect, getting used to virtual meetings and the immense productivity gains it can bring will be a positive side-effect of the crisis response.”
Nevertheless, Zoom is too expensive for his portfolios with its current valuation implying strong growth and profitability in a market in which barriers to entry are “not that high”, he says.
“This is a product with strong competition from Microsoft (Skype and Teams), and other large technology platforms that could increasingly offer a competitive product.”
‘Zoom bombing’ of schoolchildren brings negative press
Zoom is also being dogged by privacy and security issues since its surge in popularity with people gatecrashing calls in a practice known as “Zoom bombing”.
This has prompted some schools to ban the app after people Zoom bombed online lessons with lewd content. Alcoholic Anonymous and Narcotics Anonymous meetings have also been targeted, while the Financial Times is currently investigating one of its journalists for attempting to get scoops by sneaking into sensitive company conference calls.
In response, Zoom introduced a 90-day plan at the start of April to address privacy and security concerns while simultaneously freezing feature updates. Zoom 5.0 was last week unveiled as part of this project and offers users improved encryption and privacy controls.
To Wintle, the negative press is part and parcel of investing in tech stocks. He points to the antenna problems that plagued the iPhone 4 launch and the Samsung phone battery fires as examples.
“There’s all that sort of hullabaloo around new launches and often times there are little glitches, but most of the time, they just get ironed out.”
How do you value Zoom appropriately?
Wintle acknowledges Zoom is expensive but says that is typical of high growth stocks.
“Is it expensive on traditional metrics? Yes it is. But how do you value something appropriately when it’s gone from 10 million users to 200 million users in three months,” he says.
“One’s got to slightly hold your nose and buy it with the appreciation that the revenue is growing at the fastest rate versus all its competitors,” he says.
He also plays down competition from Microsoft Teams.
“Microsoft has so many other parts of their business, which is so much more important to their business. They don’t really focus on that particular product that much.”
Although Zoom is a tactical play for Wintle, he says it may graduate to a core position “but we need a lot more trading history”.
