Zoom ‘figuring out how to excel’ in saturated video market, analyst says

MKM Partners Managing Director Catharine Trebnick to discuss downgrading Zoom stock amid ongoing macro pressures, competing with Microsoft Teams and Google Meet, Tesla integration, and the outlook for Zoom.

Video Transcript

BRAD SMITH: A gloomy outlook for Zoom Video. MKM Partners turning bearish, downgrading the video communications company from buy to hold, slashing its price target along the way to $75 from $100, citing limited risk-reward at these levels. The analyst behind the call, Catharine Trebnick, joins us now. Great to have you here with us today, and thanks for taking the time take us through your thesis here on Zoom.

CATHARINE TREBNICK: So basically, my original thesis was that their cohort groups of Zoom Room, Zoom Chat, Zoom Phone, Events, White Board, would actually reaccelerate revenue. And it just hasn't happened. I mean, right now, you have really tight budgets. People are looking to consolidate down the number of vendors they have in the IT departments, keep things on track, keep costs low. So, basically, with a saturated video market, I had expected the enterprise to really take off with the cohort group, but that just didn't happen. And so I decided to move to the sidelines.

To just give you some stats, Enterprise was-- we're expecting it to be 55% in FY '23 and going to 60%, but only growing at 14% year over year. And what's happening is, they're not adding enough new logos in the Enterprise department. In 2022, they added 50 new Enterprise logos. We're forecasting 23 in FY '23 and only 10,000 in FY '24. So between the very tight budgets, we had thought international would be a big factor in growth in '23 and '24. Obviously, we've had really heavy foreign exchange headwinds with that. They've put in a $14 million headwind for their guide. So that isn't happening.

Also, countrywide, we've been hearing from our proprietary research that they're excelling in some countries and not others. So they're looking to really figure out how to excel in France and Germany. For example, you can't sell Zoom phones in France if you don't have a staff in France to sell the phones, right? So it was even though on a positive point, the Zoom Phone is doing extremely well, and they've done 4 million seats in less than three years, but they sold so many, they don't have enough staff on-site right now to really help with the elegant integration and delivery. So, just a combination of a few things made us think maybe we need to move to the sidelines.

JULIE HYMAN: Catharine, I think it's worth digging into some of these individual things, but first, I have sort of a more existential question about Zoom, which is, does it make sense to have a video calling company as a standalone entity? In other words, we see something like Microsoft Teams, which I think has taken some market share, right? And it can be part of a suite of offerings from the likes of Microsoft. Does just having the video calling piece or even the Zoom Phone piece, does it make sense without more stuff around it?

CATHARINE TREBNICK: Well, I think it is a very good well run company. I mean, the CEO has done a phenomenal job. They're very good at innovation and engineering. And look at how many of the proliferation of products they've added just in the last three years. So I mean, Cisco also is a networking company, a security company, but has Unified Communications and Webex, right? I do think it can be a standalone company. The problem is that you had 300% year over year growth in the heat of the pandemic. I mean, most church and synagogue rabbis and priests didn't even know about Zoom, right? And now everybody knows about it.

But the problem is it really needed to pivot to the Enterprise to grow. And right now, you hit this possible recession and tight budgets, and you're just not seeing the growth reaccelerate and move away from the online business.

BRIAN SOZZI: Catharine, where is Zoom in five years? What does that platform look like?

CATHARINE TREBNICK: Well, in five years, what they think it will look like will be a workstation hub, right, similar to, I think, Teams and Google. But they've now offered email, and they've offered up calendaring as a part of that and to say, hey, you can work in within this virtual hub. In your workstation, you have a nice suite, right? So I think they are making a play to be a communication hub. But I think at the same time, that's a Hail Mary pass right now. And I think it will just lower, maybe drive down what Teams and Google are paid.

It's an idea that has to be fleshed out and see how well they do with it. But that's what I think their vision is, is to be this hub, but to be determined. The other thing is they have $5 billion in cash, correct? And if the revenue is forecasted to just stay at 5% in the next year or two, will he make a really aggressive acquisition in the next year to really accelerate that revenue?

BRAD SMITH: Acquiring who?

CATHARINE TREBNICK: Well, who could they buy, right? I mean, they tried Five Nines two years ago, and the Five Nines investors didn't like that idea and voted against it. And so then he stuck with his [INAUDIBLE] acquisitions, made some very interesting acquisitions. That's why they're doing so well out of the box with their Contact Center. But to be determined who. I'm not a good predictor on who they might buy.

I mean, they could definitely-- Contact Center is a big deal. That's one area of spend right now that is very stable. You have a buy and a lot of trouble right now with their problems. And a lot of their customers don't want to stick around for a second bankruptcy. So there's opportunity there. So they could look to buy maybe a Genesis or even go back and visit Five Nines in the future.

But right now, I would say, with the $5 billion in cash, it's going to have to be around the communication hub. Either they have to buy a Unified Communication player that does a better job at voice, just besides the phone-- maybe they take a look at RingCentral if that stock price comes in more, and they marry that up with their video. Or they go off and buy Contact Center and really push out on that. Those are a couple of options.

BRIAN SOZZI: Catherine, I think it was Elon Musk this week on the Tesla earnings call note that Zoom is now available in Tesla cars. Do you view as the car-- do you view the car as a big opportunity for Zoom?

CATHARINE TREBNICK: No. I think Tesla's dumb. Well, I mean, how many Teslas did he sell?

BRIAN SOZZI: Well, not actually Teslas. Do you think Zoom has interest to be a player in the car? Are we taking-- I guess, what I'm trying to say--

CATHARINE TREBNICK: Oh.

BRIAN SOZZI: --are we taking video calls from inside of our cars very soon?

JULIE HYMAN: I hope not, Sozz.

CATHARINE TREBNICK: Well, I don't know. I myself wouldn't want to do that, but they did announce that at their Zoomtopia last November that it was available and they did show the feature on Tesla. I don't think that's going to reignite revenue. I really think the revenue comes from Enterprise and expansion rates in the Enterprise. And that's the pivot and really being either the second one in at a large UnitedHealthcare, some Medtronic, such large global player where you have Teams, but then you have maybe a second choice for a video player, and Unified Communications.