Stock down 15% as virus treatment hopes rise but ETF giant says business model remains attractive
Some left the mute button on yesterday as Zoom plunged 15% yesterday. Encouraging news of a vaccine appears to have prompted a sell-off as concerns increase that cloud computing has reached a ceiling.
However, Global X research analyst Pedro Palandrani told WP that these fears are overdone and that investors are underestimating the high retention rates and profitability profiles.
He said: “The market seems to be concerned about future prospects, with the view that a 2021 vaccine could negatively impact cloud computing solutions like Zoom. We believe this could be a misconception, underestimating the high retention rates and profitability profiles.”
He added: “All in all, there are ample reasons to believe that the cloud computing theme still has long ways to go. As we have said in the past, the business models of these companies remain the most attractive investment characteristic as they enable strong generation of recurring revenues plus great margin expansion opportunities as costs tend to be relatively fixed.”
Global X, with $15.8 billion AUM, has a 3.7% weight in Zoom in its Global X Cloud Computing ETF (CLOU). Palandrani pointed to the net dollar expansion rate (NDER), which marked the 10th consecutive quarter above 130%, and said this shows the company is proving its ability to upsell and/or increase price to those existing customers.
“That means that even if the company adds zero new customers, they could still continue to grow sales as +30% just with existing customers, all else equal,” he said. “We do think there is going to be a normalization in the growth rate or new customers that the company onboards moving forward, but we expect churn rates and downgrades to be very minimal.
“After all, companies are realizing the efficiency of meeting with clients and partners from all over the world using cloud-based communication solutions. Even if some meetings are expected to be held in person in the future, more meetings than pre-pandemic levels are likely to be held over cloud-based solutions. This is proving to be a cost-saving center for companies that use to have high expenses around workforce travels.”
Zoom beat its third-quarter earnings expectations but signalled its epic growth story may slow. The videoconferencing software company’s revenue grew 367% on an annualized basis during the third quarter. Revenue increased 355% in the second quarter.
However, it called for fiscal fourth-quarter adjusted earnings of 77 cents to 79 cents per share on $806 million to $811 million in revenue, implying 329% revenue growth.
To counter this, Global X sees the bottom line expanding even more than sales, with its operating margin expanded by 24.65% relative to last year’s margin.
Palandrani explained: “This is because of the fixed cost nature of cloud solutions. For cloud computing companies, there is a minimal increment in costs to onboard new clients and upsell solutions. As such, there as sales grow, we would expect to see EPS growing at a faster rate even after start seeing a normalization in top-line revenue growth.
“For companies like Zoom, there are still ample opportunities to grow internationally. 69% of Zoom sales come from the America’s region, down from 80% last year. We expect emerging economies and other developed economies outside the U.S. to become more relevant to U.S.-based cloud computing providers.”
