Andrew Willis: With mixed results for its second quarter, investor sentiment around Zoom ZM has been rough—we also lowered our fair value estimate for the stock. But despite the growth of paid users not being great, it's worth appreciating the fact that most users are likely to remain, which means recurring and maybe even growing revenue streams.
This gets to the core of why we’ve assigned a narrow moat rating to the stock. At first glance, Zoom’s switching costs might not seem great. It’s as easy to uninstall, as it is to install, right? But, what happens when someone important who owns a paid account wants to call you? I bet the app finds its way back. That’s part of what’s known as the "network effect" at Zoom.
It's the same for business customers. Zoom's rapid and easy rollout during the pandemic might have investors worried about low switching costs. But being quick and easy to deploy also encourages organizations to have multiple communications apps. As senior equity analyst Dan Romanoff points out, nearly every organization of commercial size that uses Zoom also uses Microsoft Office, which includes Teams. Why Zoom Stock Is a Great Choice We think that customers are likely to remain with Zoom for years, but that silver lining might not even be the best part. Enterprise clients drove 54% of revenue, and those with over $100,000 in revenue were up 37% year over year.
Going ahead, much of the growth we see at Zoom could be further integration with enterprise customers and even programmed into other software like Salesforce CRM. And with Zoom Phone adding double the users RingCentral did last quarter—and the company’s Contact Center software up to two years ahead of deal size projections—we can see the effects of Zoom’s networks.
For Morningstar, I’m Andrew Willis.
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