On Monday, Morgan Stanley maintained its “equal-weight” rating on shares of Zoom Video, noting that it is starting to “lean more cautious as valuation prices perfection on achievement of current opportunity.” The Final Round panel discusses the call.
MYLES UDLAND: All right, welcome back to “The Final Round” here on Yahoo Finance. Myles Udland with you in New York. Time now for our Call of the Day. And today, we are talking about Morgan Stanley’s latest note on shares of Zoom. Now, the firm has an equal weight rating and a $350 price target on the stock, so you could say that Morgan Stanley is sort of just reiterating their cautious stance.
And indeed, you know, this is not a note that upgrades or downgrades the stock, but merely takes a close look at a name that has been such a huge winner during this period. And– and that currently is, to use Morgan Stanley’s exact phrasing, “priced to perfection.” So Zoom shares down today about 1 and 1/2%. But again, the stock trading at $489 a share.
Now, the simplest math that Morgan Stanley is kind of looking at here and– and saying, boy, that’s– that’s awful– that’s awful ambitious, if there’s $190 billion market for, you know, streaming video communications, and Zoom were to take 30% of that market, Morgan Stanley says, great, fine, you could probably maybe justify today’s valuation for the stock.
Now, Zoom already has about 40% of the market, and I think there are serious questions, at least in the view of Morgan Stanley, and– and I think in the view of many others as well, of where does Zoom go from here in terms of keeping their revenue per user high, gaining new customers, and keeping new competitors out of the space. And those competitors, of course, Melody Hahm, are going to be driven by incumbents in the space, companies that are much larger and have more capital to throw around than Zoom, a company like a Salesforce or a Microsoft.
Even a Slack, it’s a much smaller company than Zoom now, but certainly, with their call feature, wants to be in that same space. And– and I think it is– it is interesting to see analysts always come to this idea of, well, we’re– we’re a little wrong on the name, but I– I think we’re right to be a little bit wrong on– on the name. And that kind of feels like the direction Morgan Stanley goes in this note.
MELODY HAHM: Yeah, a lot of defensiveness here. And among the other names, too, that you did not mention, namely Google, which we are using right now to broadcast our own program, and then BlueJeans we do have to acknowledge, which is owned by our parent company Verizon. But just thinking about the note, what– the one word that really stood out to me is the “prosumer.”
You know, every analyst is trying to be cheeky here now and come up with really innovative ways to define the demo we’re talking about here. This is not the consumer, right? This is not an average Netflix customer who’s watching at home for leisure. This is specifically a business use case, right? Although during this time, we’ve, of course, gone onto Zoom, gone onto Hangouts, gone onto FaceTime a lot more than perhaps we previously had in order to stay in touch with friends and family.
Ultimately, Morgan Stanley is asking a very valid question. How many more prosumers are there, right? How many more of these licenses will these large enterprise companies need in order to keep these meetings robust and continue to expand in that area? The one thing I want to point out is, there are many different programs, right, when it comes to the Zoom consumer.
There’s, of course, the free one. You can have 40-minute calls that are completely free, and many of us actually use those Zoom services. That’s what I have right now. But then if you look at the other subscriptions, whether it’s Pro or Business or Enterprise, ultimately the max that you can handle is about 300 people on a call. So this is great for trying to engage, trying to have an interactive feature, but there is still a distinction with the webinar, right?
There are still very much webinars that are taking place where the idea is for it to be a conference. We talked to the hotel– the Lodging and Hotel Association CEO last week, right, who specifically said that hotels are the site for those larger sort of enterprise conferences. The question is whether Zoom can actually replace those fully. Up until this point, when we look at a lot of the ways that Apple, Facebook developers have been organizing conferences, it has not actually been through Zoom, right?
So if you think about the potential TAM when it comes to the much larger sort of arena stadium avenues, that is sort of a missed opportunity. And then one– one other thing that Morgan Stanley notes is that in the short term, they’re not anticipating that Zoom will actually diversify its portfolio when it comes to its product mix, right?
They are focused on unified communications, UC, as the abbreviation is, and that’s basically just video chatting like we are right now. The question is, will they be able to enlarge, become the Salesforce, become the Google Suites, in order to have the Word documents, have the Excel spreadsheets all in one place? If they can do that in the next couple of years, I do feel like that larger bullish case is justified.
MYLES UDLAND: Well, and– and to follow up on that, Melody, too, I think, you know, we’re kind of all– we’re all being hard on Zoom here because– because the stock went from $65 to $500 a share. So I– I think that is also the challenge here for analysts and investors, which is that no one denies that the Zoom product experience is far superior to Webex or Hangouts, frankly. I mean, it– it’s a great, great product.
But when your stock, again, almost 10Xs in a couple of months, you have a large bull case and a lot– you have a lot to live up to at that kind of valuation and that sort of stock appreciation. And so I– I do think as we get through the most acute phase of the crisis and we take a step back and we say, OK, I’m probably going to be using Zoom for work for a long time in a deeper way, education as well.
But, like, all those Zoom calls we have with friends in the beginning of the pandemic, I– I don’t really feel like those are happening anymore. Like, I– I would rather see people IRL. Phone calls are also fine. FaceTime still exists. So you kind of come up to this wall where it’s like, yes, again, great product, amazing product, but the stock going up this much really makes things challenging for everybody.
MELODY HAHM: You sound like Kanye. Remember he tweeted that FaceTime is the best innovation? Like, who needs all of these new services when you have– the people that you want to be able to FaceTime with or be able to video chat with on a personal level, you should have their contact, right? You should be able to ring them up on your cell phone in a way that’s not in this business prosumer space.
To your point, Myles, I do feel like even Zoom, right, when executives have spoken over this past year during earnings reports, they recognize that this is way beyond their own wildest expectations and the TAM that they had purported was in their kind of stratosphere right now. This is not looking ahead.
But to your earlier point when you introduced the Call of the Day, this is priced too much to perfection to the point where if there is any sort of slippage, if there is, you know, the fatigue that we did see and we’ve heard reported over the last couple of months really come to fruition in a way that all of your free time will no longer be on these platforms, then, yeah, the stock has run way too far for– for what we’re dealing with here. And the– the product is– is great, to your point. It’s just, how many other sorts of mechanisms can it provide to the consumer that’s actually useful and not seen as another way to be spending your time doing work essentially?
MYLES UDLAND: Yeah, I think– I think the team at Zoom right now is probably thinking like, OK, well, oh boy, we got a lot of capital on hand, and now we can rethink our five-year plan in a different way. But as– as you know, Melody, I don’t think anyone who works at Zoom or who is an executive at Zoom would say much other than, yep, the– you know, they– they do the Elon, right? Stock seems pretty high. And I think that’s fine to admit when you’ve kind of gone through a period like this.