I am still in the process of gathering more information and writing the long-form post that I do once a week, but I thought to share some quick insights.
I think Zoom ($ZM) is in trouble.
Zoom benefited significantly from the pandemic, as the demand for its products surged. The revenue growth in 2020 was 88%, followed by 326% in 2021 and still an impressive 55% in 2022.
\Fiscal years ending January*
However, the pandemic is behind us, and so is Zoom’s growth. During the fiscal year 2023, the revenue was up $293 million (roughly 7%). But this isn’t the bad news. To understand what is actually happening, we need to take a look at the operating expenses, especially one group - Selling & Marketing.
The purpose of this expense is self-explanatory.
Well, it increased from $1.1 billion to a whopping $1.7 billion in 2023 (from 28% to 39% of revenue).
Let me make it clear, Zoom spent $1.7 billion on Selling & Marketing, and increased its top line by less than $300 million!
This is the simplified conclusion. The reality is a bit more complex. The $1.7 billion brought a lot more revenue, not only the net increase. What we’re missing in this equation is the revenue that was lost during the year, due to cancellation of the Zoom plans. Although this doesn’t exist as a separate data point, it is quite clear that the management decided to focus on not reporting revenue loss during the year by doubling down on Selling & Marketing.
However, this has an impact on its margins.
This increased expenditure reduced their operating margin to roughly 6% from 25% in the previous two years.
The response that many will have is: “So, all the company needs to do is, reduce the Selling & Marketing expense, and their profitability will go up, right?”
Well, profitability, in terms of higher margins, is likely. However, it will come hand in hand with lower revenue.
Zoom is not only not a growth company at this moment, but also one where the management needs to decide between keeping its market share and actually delivering returns to the shareholders.
The complete analysis including valuation will follow this Sunday.
[link] [comments] https://www.reddit.com/r/stocks/comments/14tauet/zoom_zm_is_in_trouble/
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