A COVID-19 Winner

Written by Jennifer Clark
Posted September 2, 2020

The coronavirus pandemic continues to affect the entire world. It has taken lives and put many people in tough economic conditions. There is a lot of uncertainty about how and when this virus will subside. Despite all of the hardships wrought, there are companies that have benefitted from the virus. 

There have been some real winners during this pandemic, and the one I want to talk about today is a company you'd probably never heard of at the beginning of the year (and maybe you would have never heard its name if not for the pandemic). The company is Zoom Video Communications (NASDAQ: ZM), which had only been public for about a year before it became a household name. 

Almost everyone has used Zoom’s video-conferencing platform. Government stay-at-home orders left people scrambling, trying to figure out how to stay connected with friends and family. People desperately wanted to feel less isolated, so they turned to Zoom’s free platform, which allowed them to hang out with the people closest to them like they did when everything was "normal." Teachers and students also used Zoom’s platform to help them connect and complete lesson plans. It was a quick and easy way to turn physical classrooms into virtual classrooms. Of course, it wasn't perfect. After all, most of us have never lived through a pandemic.

Thanks to COVID-19, Zoom and its cloud-based, peer-to-peer software platform for teleconferencing, telecommuting, distance education, and social get-togethers made a name for itself. Fast-forward to about six months later, and there are still people telecommuting and distance learning. Some colleges had decided to resume in-person classes for the fall semester, however, with the rise in COVID-19 cases, some of those universities have changed course and decided to move towards online classes for the fall. 

The demand for Zoom’s platform is extremely high. And that demand can be seen in the surge of Zoom’s stock over these six months. When Zoom went public on March 22, 2019, shares were priced at $36 apiece, and as of close on Monday, August 31, shares were at $325.10. That’s an 803% increase since the company IPO'd a year and a half ago. It’s hard to believe. And who truly knows if the company would have experienced these gains if it wasn’t for the coronavirus pandemic?

With Zoom's free users rapidly increasing, to really become successful, the company needed to convert them into paid subscribers. Zoom depends on its own data centers and cloud providers which means it's bearing the costs for those free users. The company reported that its revenue rose 355% to $663.5 million, which exceeded analysts’ average estimate of $500.5 million. 

Zoom has managed to increase its gross profit by 71%, up from 68%, but that’s still below what the company operated at before the rush of free users to its platform. Converting free users to paid users is something that the company will need to work on. But that could become a problem and cause those free users to flock to other free video services.

The company has been able to make as much money in May, June, and July as it made in all of 2019. For the third quarter of this fiscal year, Zoom adjusted its earnings of $0.73 a share to $0.74 a share on revenue of $685 million to $690 million. Founder and CEO Eric Yuan had this to say during Monday’s earnings call:

Our ability to keep people around the world connected, coupled with our strong execution, led to revenue growth of 355% year over year in Q2 and enabled us to increase our revenue outlook to approximately $2.37 billion to $2.39 billion for FY21, or a 281% to 284% increase year over year.

Without a doubt, it’s been an exceptional year for Zoom, landing the company large deals with corporate clients. During its earnings call, the company revealed that the number of corporate clients with more than 10 employees had increased by more than 400% in the past year. Zoom has been able to add more than 200 paid clients that spent more than $100,000 in the past year.

It’s hard to say right now if Zoom will be able to keep up with these earnings since a lot of its business has been because of the coronavirus pandemic, and it’s hard to predict how long the virus will be around and how long people will have to rely on video conferencing to stay connected.

Until next time, 

Jennifer Clark
Pro Trader Today
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