This recent IPO stock was just named and IBD (Investor’s Business Daily) Breakout Stock, which highlights stocks in or near a buy zone.
Zoom Video Communications, Inc. (ZM)
From Cabot Stock of the Week
Tracking recent IPOs is great way to find new growth stocks. In fact, we have a couple of computer screens set up just for this subsector of the market so that we always have our eyes on any IPOs with great growth and liquidity; if a new issue has all the characteristics we look for, there’s a decent chance it will become a big market leader sooner or later. (FYI, Liquidity is often the hardest thing to come by in new issues, but it’s important, signaling many big investors are actively building positions.)
This year, obviously, has seen a ton of high-profile companies come public, including Uber, Lyft and Pinterest, but the recent IPO that checks the most boxes for us is Zoom Video Communications, Inc. (ZM). Zoom appears to be revolutionizing the videoconferencing industry with what by accounts is a better, easier-to-use solution.
While the videoconferencing industry has been around for years, it’s still riddled with inefficiencies. The one statistic that highlights this: According to one study, a whopping 94% of virtual meetings are still audio-only (conference calls), which is amazing when you think of how video (streaming products, etc.) has permeated the rest of our lives.
The main reason? Most current video solutions were simply built on top of systems that were originally made to handle voice or chat. The result is often low-quality video that varies with bandwidth and the number of users, along with an interface that’s hard to navigate and isn’t intuitive.
Zoom, on the other hand, has built its platform from the ground up for the new digital age. It’s video-first and cloud native, built to deliver reliable, high-quality video across a range of devices. In the company’s words, it’s developed a “proprietary multimedia router optimized for the cloud that separates content processing from the transporting and mixing of streams.”
Translation: Zoom delivers excellent performance even when bandwidth and network performance is subpar; the platform can deliver a productive meeting experience even with up to a 40% loss of packets (those little pieces of video that are transmitted around the internet). Throw in an intuitive interface, a simple installation process (workers can often access zoom through third-party apps they already use, which greases the skids), and topnotch customer support, and it’s no surprise the firm’s offerings are being adopted fast.
The core offering is Zoom Meetings, which includes a full suite of features so that people can connect with each other. But the company isn’t just about video, as it’s launched a cloud-based phone system that integrates with Meetings.
All told, Zoom’s offerings have been a hit, with thousands of customers of all sizes signing up for a variety of uses. (One of our favorite examples: One good-sized hospital uses Zoom to connect specialists live into operating rooms to improve results!) And that’s led to rapid revenue growth—the top line expanded 149% in 2017 and another 118% last year. The bottom line is still in the red, but it’s good to see Zoom’s cash flow operations in positive territory.
As for the stock, it’s so young that there’s not a ton to analyze, but a few things stick out. First, ZM priced at 36 but closed its first day at 62. Second, the stock rose in a big way from there, reaching as high as 90 in mid-May. And third, trading volume has been very solid; ZM regularly trades north of three million shares, or $220 million of volume per day.
Tim’s Note: I like ZM’s strength—way more impressive than UBER or LYFT or PINS—and I like last week’s pullback that took the stock right down to its 25-day moving average at 75. The stock will be volatile, so short-term risk is high, but if we can stay in the saddle, the prospects are bright. Earnings are due June 6 (today).
Timothy Lutts, Cabot Stock of the Week, www.cabotwealth.com, 978-745-5532, May 28, 2019