A Special Opp on $ZM - It's so cheap!

19 Aug, 2024

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Welcome!

Okay, today I am going to be discussing Zoom Video ($ZM) and how it's incredibly "cheap", at least on paper!

Let's start with the obvious.

There are a few things that are important to understand for each company. How much cash they have, how much debt they have, and what is the market cap. These 3 things provide you with the ability to calculate the enterprise value (total value).

Let's take a look at this sheet.

We can see that $ZM has $7.9 billion dollars worth of cash or cash equivalents (instruments that can be easily converted).

Zoom also has less than a billion dollars in debt - basically zero debt.

And finally, we can calculate the market cap (as of 8/19/24) which is just taking the share price and multiplying it by the outstanding shares. The market cap comes in around $18.5 billion.

Now, to calculate the enterprise value (EV), it's a simple equation.

It's Market Cap + Debt - Cash = EV

Therefore, it is 18.5b + 0 - 7.9b = $10.6 billion in enterprise value.

Right now, it has a lower enterprise value than it's current market cap, holy shit!

Keep in mind this does happen, but not often. Essentially, it gives you a floor to sort of play against.

Okay, before we take a look at the next ridiculously simple diagram, it's important to understand that there are 4 quadrants to determine a trade/investment:

1. Good Company & Good Price

2. Bad Company & Good Price

3. Good Company & Bad Price

4. Bad Company and Bad Price

If you can imagine, it's okay to be in #1 and #2, but the moment you find yourself placing trades/investments in #3 or #4, it's game over.

To me, we can all agree on one thing, I think... Zoom Video is cheap right now with it's enterprise value of 10.6 billion and it's market cap of 18.5b.

So, why is Zoom so cheap right now? Well, here are some potential reasons:

1. Zoom is not participating in this market rally because it has a negative beta of -.67 due to the cash on hand which actually reduces it's volatility due to the company being "low-risk". People rather chase high flying beta related names right now. - growth names

2. Zoom's growth has slowed compared to the pandemic.

3. The market doesn't like how they are focusing more on enterprise customers to stabilize revenue streams and moving away from "mass market". Often results in short term underperformance for a comp.

4. Increased competition from Microsoft Teams and Google Meet.

5. Some recent insider selling.

These are all fair to say but I am mostly leaning on the fact that it's just not "sexy" right now - i.e: negative beta due to cash on hand and not being a growth story which the market cares about right now.

We can't argue with the fact that growth is slowing, but $ZM is still a moat! Just look at this image. To me, I am long the stock for a few reasons going into earnings and would love to buy more lower:

1. Zoom is incredibly CHEAP right now (based off its enterprise value)

2. Acquisition target due to it's cash on hand - how this works is simple. - someone can essentially buy the company and take a distribution to collect the "cash and cash equivalents". (Zoom has 7.9 billion in cash equivalents).

3. Potential that they announce a special dividend. If they aren't doing anything with the cash, they might pay out their shareholders. Also, by doing so, it will reduce the cash on hand and potentially improve the beta ever so slightly. That's a win win.

4. Possible buy back with all the cash on hand. Lots of recent insider selling so not so sure about this. - I do think it's possible though?

5. Still a moat.

6. Better security than some of the other competitors & they also cater to larger enterprise companies.

7. Very sticky product for large enterprise companies. Once you start using them, you usually don't stop.

Anyways, that is why I am currently long $ZM. It really hasn't sped up to the downside which I prefer for typical over extension trades, but I feel comfortable being long. I'm in no rush with this trade, I don't really have a fixed stop, and want to stay involved unless my fundamental thesis above begins to change. I think it has the potential to be $100+ but I really want to trade it based off the thesis above. If the story changes, I'll change.

Okay, that's really it. I know this was long, but I did my best to really simplify my thoughts in a way for all to understand, especially since this is a one off type of trade for me and the more simple I can articulate it, the better!

Disclaimer: The content shared on this blog is based on my personal opinions and is intended for informational purposes only. It should not be taken as financial advice. Please conduct your own research or consult with a financial professional before making any investment decisions.

Anytime I come across a big opp, I plan on sending out a private post just like this! Make sure to invite your friends by sending this link and having them type in their email below;)