ZI - ZoomInfo: Its Growth Rainbow Is Now Approaching

2024-01-02 05:04:45 ET

Summary

• ZoomInfo is the category leader in providing enterprises leads and buying signals in the B to B space.
• The company has had a significant business concentration within the software and business services vertical.
• As these segment experienced their own contraction, Zoom's growth atrophied substantially.
• By the end of Q1-2024, about 90% of Zoom's historical ACV will have been renewed.
• Without the severe headwind from down-sells of renewing customers, significant growth is likely to return, leading to better performance in terms of revenue growth, and thus to changed investment perspectives.

An unpleasant artifact of the tech boom-is it ready to regenerate?

First, a bit of mea culpa here. I have been a partisan of ZoomInfo ( ZI ) shares for some time now, and have the bloodied countenance to prove it. I was mesmerized by the opportunity to really automate the B to B sales process and ignored the glaring issue of sector concentration. And then I was further mesmerized by what looked to be a compressed valuation, and ignored the rather obvious fact that valuation without growth for a momentum growth company is equivalent to a living death-the classic value trap. It certainly hasn’t been my finest analytical effort.

But even Shohei Ohtani strikes out with the bases loaded and his team down a couple in the home 9 ^th -which to non-American readers or non-baseball fans is the equivalent of saying that even superstar analysts can make big mistakes-and I do not purport to be any super-star analyst, although I will certainly take Mr. Ohtani’s newest contract if it were on offer.

I last looked at ZoomInfo on the pages of SA about 7 months ago. Not only was the weather warmer at that point, but so too was the share price. The shares are down by 20% since that article -and they were recently down far more than that. In the meanwhile, the ( IGV)-tech/software ETF has risen by 26% while the

But time rolls on, conditions change, and relative valuation typically gets meaningfully altered one way or the other. The market, as almost everyone is aware has been on a tear and that makes some companies which could be ignored, when so many less ambiguous stories abounded, a bit more interesting as potential commitments. Indeed, ZI shares , after making a low of $12.53/share just after the latest earnings release have seen a noticeable “dead-cat” bounce to current levels. That said, the shares are down by about 40% this past year, and down by 1/3 ^rd since July.

Interestingly, the company actually reported a small upside when it last reported and kept its guidance completely unchanged. It was the tone of the call , rather than the substance that led to the sharp decline in the shares at that point. I don’t want to suggest here that I have seen some kind of advance indication of a growth inflection for the company. I do believe that the basic raison d’etre for this company hasn’t changed, that its opportunity remains substantial and that some of go-to-market strategies it has most recently adopted are seeing early success. The company most recently has adopted what I might describe as an exceptionally conservative tone in its public discussion with investors as the following quote might suggest:

Cameron Hyzer

In terms of kind of where we were compared to last quarter, I think we expected the environment to get worse than it has gotten worse. I don’t think we see any trends currently that the operating environment is getting better.

Basically, Zoom’s problem isn’t churn per se, but the fact that when it renews many users, it sees more seat down sells than upsells and it expects this to be the case through at least Q1 of 2024. This has everything to do with the fact that for the most part, customers who are downsizing simply have fewer sales and marketing rolls who could use Zoom’s Sales OS technology. When some analysts provide negative recommendations about Zoom and its lack of growth, they seem to ignore what is actually happening, and develop a construct that is not actually derived from data. The fact is that Zoom’s issue is a pretty simple one that really has little to do with what it sells, or its competitive position or the success of its go-to-market motion, and has everything to do with the fact that many of its larger customers, have themselves, been forced to downsize their sales and marketing spend in this environment:

Cameron Hyzer

I think it’s worth noting here that the churn rate has actually not significantly improved. It’s a little worse than it was, say, in 2022 or 2021. But the big driver of the net retention change is much more that we’re seeing reduced upsell and more downsells. So, I’d say that the biggest difference is not that we’re losing these customers, it’s that they’re spending less with us. A bunch of that has to do with lower seats. Some of it has to do with tighter budgeting. But realistically, I think for the vast majority of cases, it’s not a loss of a customer. It’s a reduction in the spend with those customers that’s changing the net retention.

In the quote above, the first sentence should read that the churn rate has not significantly worsened.

ZoomInfo now has a valuation deep in value territory; that is, of course, what makes the shares of interest now, when so much else in the IT space has seen valuations reach levels that some will describe as frothy. One SA contributor suggested that a valuation of 15X free unlevered cash flow was elevated for a company such as this. Just as an aside, my valuation analysis is based on an 18X multiple of free unlevered cash flow.

But the real question isn’t that particular metric, but whether or not ZoomInfo’s prospects have deteriorated on a secular basis. Unlike the referenced article, I think the stock price is a referent to what has been, rather than to what will be for ZoomInfo. I think there is no evidence at all that suggests that Zoom’s outlook for secular as opposed to cyclical growth has deteriorated-indeed, I will make the case that the generative AI revolution is probably adding to this company’s secular CAGR.

This is the time of the year when there many 3 ^rd party research companies produce their estimates for IT spending over the coming year. The surveys may be better than Fed dot plots ; they are nowhere near totally accurate. That said, a number of these surveys are suggesting that IT spending growth for 2024 will be in the high single digit range, up notably from a year that saw spending growth in the low single digits. The Gartner survey, linked above indicates high single digit IT spending growth without the revenue impact of generative AI because of this additional element of conservatism.

ZoomInfo’s growth has been well correlated with changes in overall IT spending metrics. For a variety of reasons, not only including the forecasted growth if IT spending, I decided to stick out some body part and recommend the purchase of shares of ZoomInfo at this point , based on a less toxic macro environment, and what I consider to be exceptionally favorable valuation metrics.

There is a temptation amongst many investors and analysts to recommend waiting until there is a visible inflection in growth before taking action on a fallen angel such as ZoomInfo. I can’t deny that this would be a less risky strategy, but the problem is it almost never works. By the time an inflection is visible, the shares will have risen substantially, leaving their relative attractiveness at a much lower ebb.

I provide advice on portfolios as well as recommendations on specific stocks. I typically try to have a couple of recommendations that depend on a noticeable growth inflection for their success. I probably would not recommend a portfolio that is built solely on companies that require a growth inflection for their performance. But amongst a sea of many companies that are at, or nearing ATHs, I think it makes sense to have a couple of laggards in the mix, and this is one of my choices in the laggard category.

What did ZoomInfo report; how did they guide, and why did the shares implode after the earnings call?

Zoom’s reported quarter, and its guidance, while hardly exciting, certainly were not at levels that logically ought to have elicited the kind of reaction they did. Specifically: revenues for Q3 were $314 million, non-GAAP operating margins was 40% with non-GAAP EPS of $0.26 and free cash flow of $95 million, or a free cashflow margin of 30%. The company had projected the following results: Revenues of $311 million; non-GAAP operating margin of 40% with non-GAAP EPS of $.25. The company does not guide for quarterly free cash flow. At the end of Q2, the company had guided for annual revenue of $1.23 billion; at the end of Q3 it guided for annual revenue of $1.233 billion. It maintained its full year guidance for EPS, and for free cash flow, and reduced its year end share count estimate by a bit less than 1%. Not very exciting, to be sure, but not a guide down or some harbinger of an existential problem in the future.

The issue as I saw it was some of the conference call dialogue which was exceptionally grey at best.

Cameron Hyzer

So the environment does continue to be challenging, and we are expecting net retention for the year to be below 90%. As a result, in Q4, which is our highest period for renewals, that net retention below 100% creates a headwind that’s amplified by the higher concentration of renewals. So, as we’ve discussed, we believe that this renewal cycle, at least through the first quarter of 2024 will be challenging.

Henry Schuck

October looks a lot like September and Q3 looked. So we haven’t seen any improvement in the environment. I think overall in the business, we continue to have more success outside of the software and business services verticals. And so, we’re seeing that in October as well, but nothing different than what we saw in Q3.

Since early last year, we have highlighted the challenges of this operating environment, which include fewer up-sells, more seat down-sells and elevated churn levels. As a platform that helps customers grow and one that serves some early cycle industries, we have seen net revenue retention and our overall growth rates come down, as customers have had to rebalance growth and profitability

Cameron Hyzer

So I think I’ll kick off there. And thanks for your question. Again, I think we’ve talked about with a number of people in the past that our view is that peak negativity, particularly with respect to layoffs and many other factors kind of occurred in the Q1 [2003] period. And therefore, we do think we need to get through the renewals with our customers. And as I mentioned before, between September 2022 and March 2024, we’ll have transacted with approximately 90% of our ACV. And I think we really need to get through that period of having renewed or sold ACV with those customers ahead of time. The assumptions really are very focused on renewals. New business continues to be relatively strong. Obviously, the environment impacts that as well. But the sales efficiency of our new business team and the demand that we see continue to be good out there, and we continue to bring on new customers to support that. So, we’re really focused much more on mitigating and getting through this renewal cycle that we’re in right now.

Cameron Hyzer

Yes. So, we’re not guiding to 2024 at this time. And frankly, I think for all software companies, it’s probably less visibility further out than there has been historically. We do continue to expect that this more challenging renewal environment will persist through at least Q1 of 2022 ( SIC ) [2024] and will impact sequential revenue growth through the first half. Once we’re through this cohort of renewals, there is the opportunity to drive higher growth rates, but it remains a challenging operating environment. We certainly don’t want to get ahead of ourselves as to when exactly that reacceleration might occur.

While none of this was new or worse than the company had previously discussed, investors were disheartened by the understanding that results are likely to be challenged so far as growth is concerned through the next several months. There is very little that the company can do when clients who are renewing do so with fewer seats, because they, themselves have fewer sales and marketing employees due to past layoffs. Interestingly, despite this difficult environment, the company signed one of the largest deals in its history last quarter-$16 million of total contract value over 3 years with a large software company who became convinced that they needed to standardize on ZI after trying one of the many lower cost alternatives.

During the course of the conference call, the CEO and cofounder of ZI called out a passage I think worth repeating

This is a market phenomenon impacting companies across the spectrum of front office applications and not unique to ZoomInfo. When the cycle ends and we are in a more normalized operating environment, companies will be looking to drive growth and we will continue to be uniquely positioned to help them do just that. In this operating environment, we are committed to controlling the controllable and delivering industry-leading levels of profitability

ZoomInfo-Differentiation and Competition-it’s all about data quality

Facts are inconvenient things. There are many contributors on SA who simply refuse to believe that there can be differences in the quality of a prospect list . Other commentators refuse to accept that this company’s solutions, beyond those of its prospect lists is of significance.

At the end of the day, ZoomInfo is an information company; it sells information to enterprises to enable their salespeople and marketing employees to operate more efficiently. Are their lists more accurate than those of competitors? There is no explicit way to prove such a proposition. There are, however data points that strongly point an analyst to that conclusion.

As mentioned, last quarter, Zoom booked one of the largest orders in its history. This was an order from a software company for $16 million over three years. In the current environment a deal of that magnitude is rare, essentially unprecedented. Why did it happen?

James Roth

Yes. So, it was a three-year agreement with a large software company. So the annualized revenue is about $5.3 million, it is actually $15.9 million total contract value. And what’s interesting about the deal itself is that it confirms the centralization of data strategy, they’ve consumed multiple contact cubes, company cubes, firmographic information and really just going all in with ZoomInfo as the foundational data provider. And that’s where we landed it. We ended up growing it and locking it in for a three-year $5.3 million deal.

Again, I don’t want to suggest that a single transaction, regardless of its size, should be regarded as a definitive signpost when it comes to ZoomInfo’s differentiation. But it is equally hard to ignore-one has to imagine that the buyer must have had some basis for its selection, and I think there is little doubt that the basis of the selection is the fact that Zoom simply has the ability to furnish the sales and marketing effort of this customer with better and more extensive data than was elsewhere available.

Why might that have been so? ZoomInfo has a better system for managing and collecting the data it collects. At times, in fact, there has been a pushback by some Zoom data sources as to how effective its reach is in terms of data collection-these individuals and groups have been concerned that Zoom’s data collection paradigm can unexpectedly intrude on the privacy of some individuals and organizations. Lately, controversies based on that issue has seemingly abated as the company has taken proactive steps to ensure privacy compliance. But the fact that Zoom commands a premium price in the market is almost certainly correlated with the data it collects, its accuracy and its inclusivity. Not all prospect lists are created equal and by this time, I think, it is fair to conclude that Zoom’s list simply provide more of what large enterprise users require, and these users are prepared to pay premium prices for what Zoom offers.

I have linked here to a study of this market segment by a competitor . As can be readily seen from the link, If you can get past the Cognism commercial, there is quite a bot of useful information in this analysis. What can be seen is that Zoom’s alternatives are almost always considered to be less expensive-that is why I mentioned that Zoom commands a premium price. . The inference that can be drawn is that the lists of competitors are far more basic than the information that can be gathered using Zoom and are basically intended for SMB’s.

Just to be complete, here is a link to 3 ^rd party comparison of the two companies; once again it is clear that Cognism is for the SMB segment while Zoom has a better solution for the enterprise. It is also apparent that Zoom has an incredible library of integrations-again a feature probably most valuable for larger enterprises. At the end of the day, the 3 ^rd party analysts seem to feel that large enterprises get more of what they need from Zoom, while start-ups and smaller companies find alternatives more effective for their particular requirements:

For B2B companies that need a wide range of capabilities for their sales, marketing, and outreach teams and don’t mind paying top dollar for their services, ZoomInfo is the clear winner.

However, if your B2B startup wants to place an emphasis on sales or needs more data on clients and companies in Europe, Cognism is worth considering.

Most recently, Zoom has made improving its European data and go-to-market focus a priority which was called out in the most recent conference call. That hasn’t yet shown up in this particular 3 ^rd party survey.

One final quote in this section relates to a user who had chosen a cheaper prospect list solution when faced with signing what had been viewed as an expensive renewal offer from ZoomInfo. Apparently within 10 months, the “cheap” solution didn’t work out well and they returned as a larger ZoomInfo customer. This isn’t something that happens often, but in evaluating ZoomInfo as an investment, the fact that a user actually boomeranged back to their solution is of significance, at least to me.

Henry Schuck

Yes. Thanks, Cameron. Brent, I think -- when I started this business 17 years ago, I started it with the premise that high-quality data made a major difference in the way companies go to market. And there have been cheap alternatives to what we offer for the last 17 years. And if you’re not doing your diligence and you’re not an incredibly sophisticated buyer, you can make a switch and then you realize almost instantly that high-quality data does, in fact, make a difference in your go-to-market motion. And that’s what we saw here. We saw a customer who switched to a low-priced offering and then immediately came back and meaningfully increased their spend with ZoomInfo and did it across the platforms.

We’ve always competed in a way that said, when you have high-quality data, whether you’re an account executive, an account manager, a sales development rep, marketing operations professional, CMO or CRO, that information makes a meaningful difference in the way that you acquire, find and grow your customer. And customers see that. And so, there are a lot of boomerang customers that we find who go try something new and then immediately come back. And in this case, not only did they come back, but they meaningfully increased their spend with us.

For years, ZI has been an exceptionally profitable company. As mentioned above, its non-GAAP operating margins are around 40%. Non-GAAP gross margins last quarter were 87%; they were 85% a year ago. It is simply hard to envision a scenario in which gross margins were rising above previous levels despite an environment of weak demand for renewals, that is simply not a hall mark of significant product differentiation and pricing power. Zoom can’t sell seats to sales roles that don’t currently exist; but the company can and has been able to improve its margins because of user choice to pay higher prices for more accurate and timely prospect lists. And again, despite the disheartening macro environment, the company continues to sell a platform approach-last quarter about 1/3 ^rd of the company’s bookings were to its products beyond lists, particularly including the company’s Marketing OS offering.

Zoom’s largest competitor is LinkedIn. Obviously most enterprise conversations for acquiring sales contact data are going to include both LinkedIn and ZoomInfo. LinkedIn does have 800 million members these days although how many of those are really active is a different question. When sophisticated enterprises evaluate prospect lists, there are specific features that are considered such as buyer intent data. Machine learning models are becoming increasingly important in identifying which prospect might really want to buy a product/service. The competition between Linkedin and ZoomInfo is most often based on such features more than on price and both companies have been and are likely to remain successful. The link here is to a analysis of the competing tools by a competitor partner.

Overall, as the link above suggests, larger enterprises can readily deploy both tools in what continues to be a market growing at a significant percentage. I don’t really think it is necessary to proclaim or forecast a winner between Linkedin and Zoom in terms of reaching an investment conclusion.

ZoomInfo-beyond prospect lists and into the world of AI

Currently the most popular Zoom solution beyond its prospect lists is that of what it calls MarketingOS . Marketing OS is a set of tools that allows a user to recognize various signals from individual customers based on their inspection of other applications. Signals are functionality that is highly desired by many B to B companies. It is essentially all about streaming intent data. Basically, the solution is able to determine which individual in a management team is researching a specific subject or vendor and it reports to the Zoom user who is looking at what, when they are looking and how many times they are looking at a series of subjects that have typically indicated a buying intention. The functionality of MarketingOS is built using AI tools which determine which pairs of indications are most likely to signal buying activity.

I mentioned earlier that Zoom has 300+ integrations and this and this is where those integrations are deployed, creating a far more automated workflow than is typical in B to B marketing. There are a number of SKUs as part of MarketingOS, all focused on automating various components of the sales process. Whether MarketingOS resonates with readers, it has resonated with customers.

The company offers its customers a platform based on a Data as a Service (DaaS) capability. The service provides users with what Zoom believes to be the most accurate and actionable data that in turn is integrated into various apps, both custom built or based on pre-built templates. Part of the offering consists of what the company describes as data cubes. There are all different kinds of data cubes that are intended to provide appropriate data for an enterprise. The cubes have nothing to do with those used to sweeten coffee but are used to represent an array of values typically used for analytical processing. This link to a Zoom blog , best describes the functionality and necessity of a data cube. In terms of expectations for renewed growth, it is these cubes that are likely to be where meaningful positive growth becomes apparent.

I must confess that much of what Zoom offers customers might seem incredibly complex and dare I say geeky. The days when a sales team got a lead and closed a sale are long past for most larger enterprises. C suite executives are very focused on process and marketing efficiency. The fact is that most of what enterprises buy these days in terms of marketing software is far beyond just a contact list of names, email addresses and phone numbers. Zoom has developed an eco-system of sophisticated tools that appeal to marketing officers at the largest companies; even in this environment the company has had success in selling to those kinds of users, and has seen companies with less sophisticated sales processes downsize the number of seats they are consuming from Zoom.

Many C-Suite executives are looking for generative AI solutions to enhance the efficiency of marketing and sales processes. In late September, the company formally released its first generative AI solution . The solution resides within the company's Chorus application . I have linked to the announcement for those readers interested in what is actually on-offer currently from Zoom. Basically, this generative AI product automates meeting notetaking, it provides follow-up notifications and keeps track of task assignments and completion as defined by a meeting. So far the company is offering AI driven solutions as part of its core offering, with the aforesaid enhancements to Chorus. It is also offering a product called Companion which lets helps users automate repetitive tasks.

The meeting notetaker is an SKU, while the assistant product comes as part of a paid subscription to Zoom's technology. The concept is that with Companion, the company will enable additional workloads and lead to the sale of more seats. To date, about 2 million meetings have been transcribed through Chorus. Over time, I expect that AI will be a significant component of Zoom's solutions to better enable signals and intents as its correlations are improved. All of this is very far, indeed, what is available from the cheaper, less capable tools in this market.

The evolution of AI in the marketing automation space is likely to be measured. Users want generative AI to tell their sales staff who is the appropriate recipient of a message, when they should be called, and then followed up, what solutions should be presented and how the message should be framed. The following is another conference quotation which focused specifically on how Zoom's data is differentiated, and how it produces better signals and insights for Zoom customers.

These are still very early days for the use of AI but the vast amount of proprietary non-publicly available data and insights that we collect and are able to use AI and LLMs against, that’s what we’ll -- that’s what is making our product even more relevant for sales users. And without that proprietary data, without the information that sellers need to actually engage with their customers and know when to engage with their customers, any AI you put on top of just generic data doesn’t spit out relevant insights for a sales rep. And so, we’re really confident that the underlying foundation of data and insights that we have at ZoomInfo, which is proprietary and not available publicly is what will drive that pane of glass for sales reps.

When does Zoom’s business inflect?

The quick answer is that overall, a specific inflection point is not precisely knowable but Q2-2024 seems as good a guess as any. The CFO has proven very prudent in setting forecasts and I doubt that he will forecast a return to significant growth until after, and not before the company is seeing progress in terms of revenue growth. Until that time, it seems as though owning Zoom is owning an asset with a free cash flow yield of 6%+, not entirely an unacceptable return as much of that cash flow will be used to shrink the company’s outstanding share count.

Zoom, as mentioned earlier, has a significant level of sector concentration. The company’s software and some business services customers are struggling with their own level of demand. There were no signs that these business segments had seen increased demand for Zoom services through October.

As mentioned earlier, there are surveys suggesting that IT spending growth is likely to be stronger in 2024 than in 2023. Just exactly how stronger growth in IT demand translates into stronger growth for marketing tools is not totally knowable; presumably if Zoom’s software and business services customers see their own businesses improving, their propensity to add marketing functionality will grow, and at some point they will start to add sales employees, in turn increasing demand for Zoom seats.

Zoom is continuing to grow outside of the software and business services verticals. And business with larger companies is also growing. Its business with mid-size software companies has continued to decline.

Zoom’s business these days is very much a tale of two cities. Many of its larger customers are growing consumption and adopting new solutions far beyond contact lists. Demand for DaaS is growing noticeably; it is part of the marketing paradigm these days. The company continues to close significant transactions and last quarter, had noticeable success closing large deals with users outside of the software vertical. Last quarter some significant Zoom transactions included the following: Verizon, Walmart, Paramount CBS, Sage Hospitality, Steam Logistics, CDW, Tenet Health, The Washington Post, FranklinCovey, Lands’ End and Magellan Health. Zoom's sales engine is clearly not firing on all cylinders with all classes of users; neither is it moribund or suggestive of an existential demand problem.

Of course, as previously mentioned, Zoom's largest deal last quarter was with a software company. But smaller customers in the software vertical are noticeably cutting back on their seat commitments and spending less with Zoom when they renew. In a way, this is analogous to the cloud optimization that has been seen by many vendors. In both cases, the impacts wane as users pass the anniversary point of renewing their commitments. One of themes the CFO propounded frequently during the call is that by the end of Q1-2024, 90% of Zoom’s ACV will have renewed. When the headwind posed by renewal down sells abates, the company is likely to see a return to revenue growth regardless of the current environment. It is that kind of set-up that is likely to result in upsides in terms of revenue growth compared to the currently published 1 ^st Call consensus which shows growth in the low single digits next year.

While the CFO was unwilling to explicitly forecast a return to growth at the end of this period of renewal down sells, the math strongly suggests that is likely to be the case. I believe that the most likely case for the renewal of significant growth for Zoom will be in the 2 ^nd quarter of 2024

Zoom: Some valuation metrics and the restating the case to buy the shares now

As mentioned, most investors buying Zoom shares now, are doing so not because of current growth metrics which are effectively zero, but are doing so because of the company’s very strong business model and its future growth opportunities. The company has seen its growth atrophy from almost 60% a couple of years ago to essentially zero; in that time, the company’s non-GAAP operating model has remained more or less constant, with non-GAAP gross margins remaining constant in the high 80% range. The company’s free cash flow margin has diminished somewhat to around 37% from 42%; this is essentially a function of fewer customers prepaying for software-an almost universal phenomenon in the software space.

The company currently has an EV/S based on expected revenues of $1.255 billion over the next 4 quarters of 6.1X. The real question is not the relative EV/S ratio; just for the record, and using the current free cash flow margin of 36% the EV/S of 6.1X is noticeably below average for the company’s growth cohort. It is the growth cohort that is questionable.

The company isn’t currently growing, its forecast is for no growth in Q4 and the conference call suggested that there would be no growth in Q1 of 2024. So why buy the shares now?

I do not suggest I have prescience when it comes to forecasting a growth h inflection for this company or for much else, come to that. I have presented an argument as to why growth at a noticeable level will resume in Q2-2024 and will steadily improve from that point. The cadence of growth thereafter is really not knowable at this point.

I don’t have some crystal ball that tells me what a 3 year growth rate might be. In an abundance of conservatism, I used a 14% CAGR in my analysis. Even with that kind of growth, ZI shares are far below average for the company’s growth cohort when considering its free cash flow margin.

There are those who do not choose to believe that ZoomInfo has a massively differentiated solution compared to its many competitors. While I have presented a view supported by several 3 ^rd parties that suggests that Zoom has greater capabilities and a more complete data set than its competitors, there are those who seemingly ignore the evidence.

At the moment, Zoom has one set of generative AI solutions as part of its suite of Chorus products. That said, however, Zoom has been using AI for some time to improve the accuracy of its data set and to improve the validity of its signals. There is no sign, despite the environment, that Zoom’s competitive position has deteriorated, that is differentiation is less now than in the past, or that is go-to-market motion has been in anyway compromised. Its ability to close very large new deals in this environment suggests that sophisticated/larger enterprises find its value proposition uniquely compelling and are willing to pay a premium price to acquire Zoom technologies and mainly its data.

I have made the case earlier in this article that a reasonable portfolio strategy would be to start building a position in the shares before a growth inflection was visible. The fact is that some of the recent bounce in the shares is most likely an expectation that growth is likely to accelerate from current negligible levels. By the time the company’s growth recrudescence is visible, the shares are likely to no longer have the bargain valuation they currently do. Given the substantial level of appreciation that has been seen in most high growth IT shares, I think considering a commitment in a company where growth is still a bit over the rainbow makes current sense. I think growth will happen, and thus I suggest that Zoom shares are likely to achieve significant positive alpha over the coming year.

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