Zoom has announced that it will be going public on April 18th 2019. This has generated substantial hype and lead to a valuation of $36 per share tomorrow. In this article I will discuss;
- Potential opportunities & threats with this IPO
- Historic tech IPO cases to forecast
- What I plan to do
Zooms Performance & Offering
ZOOM has announced its plans to go public with 9,911,434 shares being offered by the company and 10,958,131 being offered by private holders. These shares will be made available at $36 for a rough valuation of $9.2 billion according to CNBC. The original price discussed was $28-32 and was adjusted to better reflect investor demand according to CNBC. This has some investors questioning whether the $36 opening price is well placed. Sales in 2018 saw significant decreases across many measures primarily due to tariffs and other constraints as cited by leadership. Q4 net sales were down 15.8% to $7.5m but net sales increased 9.9% to $32.3m. The story is the same across many measures, decrease in Q4, but an increase for 2018. This led to Zoom experiencing a net loss of $826,000 ($0.05 per share) for Q4 2018 compared to $387,000 in Q4 2017 ($0.03 per share). A wider look at the yearly numbers reveals a 2018 net loss of $74,000 ($0.0 per share) and a net loss of $1.37million for 2017. A deeper dive into Zooms financials confirms the bullish sentiment with things such as a decrease in administrative expenses by $522,000 to $589,000 for Q4 2018. Although the report reveals many promising factors like this, the question remains for the political relations impacting the broader tech industry. Frank Manning (Zoom CEO) has cited tariffs and other related headwinds as being the leading cause in the decreases witnessed. Have these headwinds been addressed? A look at the broader sector would suggest progress is being made, but a full recovery is yet to be realized. With these thoughts in mind, tomorrows stock price will likely not be reflective of future long term value as the hype has taken over with people such as Emergence Capital and Sequoia owning nearly a $1billion stake in the company.
Opportunities of IPO
Zoom has announced its offering above estimates of $33-35, raising the question of whether this is justified or not. Snapchat went public at $17 and rose to $25 suggesting a misalignment in the offering price and investor demand. Although this initial gain was sizable, the company has since faced many headwinds such as the CFO exiting after just 8 months on the job. Although the two markets they compete in have few areas of overlap, I believe the market reaction is shaping up to a similar scenario. The result of these historical cases, in my opinion, has led to Zooms high offering and valuation in hopes of navigating potential upcoming headwinds. With this mind, the hype surrounding Zoom seems to forecast a potential swing opportunity in “playing the pop.” IPO’s in 2018 saw on average a 15.7% increase in share price, suggesting a compelling story for a quick play. A further look at these statistics reveals an average of -16.7% at the end of the year, further supporting the thesis of playing IPO’s for the short pop potential. Although these statistics have commonly proved true, there are several occurrences which have fallen out of line. Hyped IPO’s which see an unexpected reaction. Just take a look at Facebook. Due to these statistics, it makes sense for Zoom to list at a high number as to raise more capital and hopefully reach a healthier equilibrium with investor demand. The question is, will demand to remain high and incite a pop? There is already some investor concern with the listing price, will demand to remain high at such a high value?
Threats/ Concerns For Zoom Share Price
Although historical numbers reveal a compelling story in playing the initial pop, a long term hold from IPO may present a substantial unexpected amount of risk. We talked about Snap earlier, which has experienced nearly -80% of its value whipped out after things such as Kylie Jenner’s tweet whipping out $1.3billion from its market cap. Zoom has its own set of material events we can keep our eyes focused on that may result in a decrease in stock price. Recent tech IPO activity has had a significant impact on competitors such as Lyft experiencing -35% at its low on news of Uber planning to go public. This prior to any of the forecasted material events in store for Zoom and raises many concerns with the future share price. We’ve seen a similar impact with companies such as Pinterest planning to IPO. Another potential threat to gains in this position is a market rejection of the offering price of $36. Some are already beginning to question this valuation, citing Zooms competitor Skype being purchased by Microsoft for $8.5billion in 2011. At the time Skype was reported having roughly 700,000,000 users, similar to Zooms numbers. The primary threats to Zooms stock price after IPO are; Tariffs/other tech headwinds impacting quarterly numbers, Insider sells, first earnings report, etc.
The headwinds facing tech seem to be easing but have yet to fully reverse and still present investors some risk exposure when observing various tech giants current stock price. This is concerning from an IPO to long term hold as negative earnings will likely devalue share price substantially. Snapchat saw a -15% decrease in Q1 of being public after negative results were witnessed in user and revenue growth. It is much less risky to allow the business to prove itself with a couple of quarters as opposed to gambling on the results. If earnings are positive and headwinds are alleviated, the stock price must still navigate potential insider sells. Executives must wait 180 days to sell any position to prevent further volatility in price. Once these 180 days are up investors need to keep their eyes peeled on insider activity, potentially suggesting future share price. In addition to this 180 day period, investors need to be privy to the 365 day period which will apply to sales force who has plans to buy $100million in class A shares. Historically, many companies experience dips as these periods expire due to people wanting to cash in on their positions. If these events are properly navigated, investors will be seeking an increase in performance. Although Zoom is unique in the sense of already being profitable, analysts and shareholders will be critical of performance in expecting growth on the presented numbers. To do this, Zoom will need to properly position against competition such as LOGM.
I have too many questions in Zooms valuation and offering price of $36 to be bullish this early on from a long-term perspective. I need to see Zoom thrive in the critical eyes of investors prior to agreeing with a high valuation. With that in mind, the company has generated a significant volume of “hype,” suggesting potential gains in a short swing position. I will be eyeing price action for a potential move tomorrow, but personally favor some of our other picks such as NDRA. This will undoubtedly be a volatile move in either direction and is best to mitigate exposure against. If a short move is made, I plan to pull profits asap and move back into my primary focus of NDRA, etc.
I do not own any share of Zoom but may enter a short term position as discussed above. I was not compensated by Zoom or any other company discussed in the article to write the piece.