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Zoom-ing in on the Strengths and Threats of Zoom
Stock Analysis & Ideas

Zoom-ing in on the Strengths and Threats of Zoom

Shares of video-communications provider Zoom (ZM) have plunged around 20% since it released its second-quarter fiscal 2022 results on August 30, pulling down the valuation of its impending all-stock acquisition of Five9.

Putting it into context, Zoom had inked a definitive acquisition agreement with Five9 back in July this year. Five9’s software products for contact centers, such as workforce management, speech recognition, predictive dialer, etc., are offered through a virtual contact center cloud platform, enabling inbound and outbound customer interactions in a single platform.

The deal is expected to close in the first half of calendar year 2022, helping Zoom penetrate the $24 billion global contact center market. If the acquisition materializes, Five9’s CCaaS (contact center as a service) solution will be integrated with Zoom’s broad communications platform.

However, the acquisition has a few hurdles to overcome, due to which I have a neutral stance on the stock. Needham analyst Ryan Koontz, who has been closely following Zoom’s developments for the past few weeks, identified a few key possibilities that can dampen the company’s growth efforts in the near future, and some upsides that may mitigate those risks.

For starters, the majority of Five9 shareholders are not too happy with the deal, and may either straight-out vote against the acquisition later this month, or make more demands. However, Koontz sees a possibility that Zoom might offer Five9 shareholders a mix of stock and cash worth around the original implied value of $200 per share. This might turn around the negative investor sentiment.

Koontz believes Five9 to be the only pure-play enterprise CCaaS company in the world, and its acquisition intention demonstrates that Zoom is looking at acquiring “adjacent-product, growth companies with well-established enterprise channels.”

Again, although Zoom has displayed excellent efficiency and execution during the pandemic, one trend concerns the analyst. Koontz stated, “We are concerned that the growth at the low end, namely pro-sumer and small business customers, outpaced the expansion of the company’s mid-market and enterprise business.” This low-end of the market typically sees a high level of customer churn, and may pose as a headwind before Zoom can grow its Events and Platform sales.

“We choose to wait for better insights into post-pandemic and new product trends before getting more constructive on the stock,” explained Koontz, maintaining his Hold rating on the stock.

Koontz notes that there is a likelihood of Zoom shifting its focus from the contact center to its new Events strategy. He believes that the company can achieve scale in this area by taking the path of strategic acquisitions.

“We view the events industry as highly complex and a key area where Zoom could benefit from acquiring complementary, non-video centric products, staff, and industry know-how to more quickly establish the deep ecosystem required for enterprise-scale events,” he said, pointing at the announcement of a possible investment in event marketing and management company Cvent.

Notably, Koontz looks at Cvent as a more favorable acquisition candidate for Zoom, as against virtual events companies Kaltura (KLTR) or On24 (ONTF), which are not as advanced in enterprise channel development as Cvent.

The consensus rating for Zoom is a Moderate Buy, based on 10 Buys and 8 Holds. The average Zoom price target of $375.85 indicates an upside potential of 35.08%.

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Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.

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