Tech

Zoom is poised to be one of the most richly valued tech companies after it goes public

Key Points
  • Zoom appears as if it will be valued like Zscaler, Okta and Atlassian, the cloud stocks with the highest multiples to sales.
  • The company has the unusual distinction of being profitable while also growing over 100 percent.
  • Zoom gave a price range of $28 to $32 per share and could raise the price, depending on demand.
Zoom Video Communications CEO Eric Yuan.
Courtesy of Zoom VIdeo Communications

Amid all the hype surrounding this year's big consumer IPOs like , Pinterest and Uber, investors seem most excited about the debut of a company that sells video-conferencing software to businesses — Zoom.

That's because Zoom has the unusual distinction of being profitable while also growing at over 100 percent annually. It's a formula that public investors don't see often from cash-burning Silicon Valley.

Zoom's success is built on the simplicity of its technology compared with older video and collaboration products from Microsoft, Cisco and Citrix. The service gained popularity at start-ups and with small teams and has emerged more recently as a package of tools used across large enterprises through what the company describes in its online roadshow as a "viral adoption model." For example, a group uses it — say the marketing department or a team of developers — and those employees start bringing in people from other parts of the organization.

Doing the math

Zoom's Wall Street debut is expected next week. On Monday, it gave a price range of $28 to $32 a share, and given the commentary from investors, the price could go even higher. But even if it just prices at the top of the current range, Zoom will be one of the richest valued software companies on the market.

Here's the math:

At $32, Zoom would have a market value of $8.25 billion. Based on trailing full-year revenue of $330.5 million, that would give Zoom an enterprise value-to-sales ratio of 24.5.

That's before an expected first-day pop.

Lyft has an EV/sales ratio of 10.4, and Pinterest's ratio is about 11 based on the top end of its price range.

If you look at Zoom's peers — cloud software companies valued at $1 billion or more — only Zscaler, Okta and Atlassian trade at a premium to its projected multiple, according to FactSet.

Zscaler has the highest EV/sales ratio at 31.8, as the security software company's stock has quadrupled since its IPO last year.

If Zoom were to price at $32 and go up a fairly modest 30 percent in its debut, it would have a similar multiple to Zscaler.

ServiceNow and Workday have ratios close to 15 and Salesforce's is under 10.

Because of Zoom's 118 percent growth rate, the stock could be considered cheap, even at these lofty multiples. Zscaler's revenue increased 50 percent in its latest fiscal year, while Okta grew 54 percent and Atlassian by just over 40 percent. If Zoom's sales growth slows this year to 100 percent, the forward EV/sales multiple at the top end of the IPO range would be about 12.3, compared with 23.1 for Zscaler, 18 for Okta and 20 for Atlassian, according to FactSet.

Zoom's net dollar expansion rate, or the amount of money it pulled in from existing customers, was 140 percent in the most recent fiscal year, according to its prospectus. The company now has 344 customers spending over $100,000 a year, up from 54 in that category two years ago.

Another area of efficiency is the makeup of the employee base. Zoom has over 500 employees across multiple research and development centers in China, which accounts for about 30 percent of its total workforce.

Zoom's profitability — it reported net income of $7.6 million last year — stands in stark contrast to Lyft, which went public earlier this month. Lyft lost $911 million in its most recent year, spending over $800 million on sales and marketing to increase brand awareness. Pinterest, whose IPO is also scheduled for next week, had a net loss of $63 million.

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