A couple of updates.
First, I’m going to begin sending a weekly Sunday Dump. These dumps will generally cover what I was thinking about and researching during the week. As time goes by they may start to include more consistent content like portfolio allocations and updates.
They are meant to be read on Sunday morning when that first cup of coffee hits.
Second, I’m going to sunset the quarterly earnings reports for Bitcoin and Ethereum. Enough free tools have been developed now that anyone that wants to can get access to much of the information in real-time. Two of my favorite resources for this are Glassnode and Token Terminal.
Zoom Earnings
Zoom (disclosure: long) released their Q4 and CY22 (FY23) earnings on Monday, and the update was received favorably with the stock popping 8% after hours, before giving it all back in Tuesday’s session. I continue to be bullish on the stock and think forward revenue growth estimates are simply too low, reflecting current business headwinds that are temporary.
For context, here is Zoom’s actual and estimated revenue out to 2027.
As you can see, huge pandemic-fueled growth in 2020 and 2021, followed by a more subdued growth rate in 2022 that analysts think will persist going forward.
But the headline numbers betray some of the business realities beneath the surface.
Zoom has two main revenue lines segmented by customer type: Enterprise and Online. Enterprise will typically be your Fortune 500 type customers and Online refers to self-serve individuals and small businesses.
Before 2022, Online accounted for a majority of Zoom’s revenue. This makes sense — at the onset of the pandemic, individuals and small businesses who were previously without any video communication solutions at all rushed to sign-up due to Zoom’s self-serve capabilities and ease of use. But in 2022, Enterprise surpassed Online, making up 57% of revenue in Q4.
This mix shift has been driven by strong growth in Enterprise coincident with negative growth in Online. In 2022, Enterprise revenues grew 24% and Online reevenues declined 8%. While individuals and SMBs are returning to in-person work and cancelling their subscriptions, enterprises are adjusting to a new hybrid work reality and upgrading their video communications solutions.
I think investors are seeing the slow-down in top line growth and assuming it’s reflective of the entire business, without considering Zoom’s transition from video-calling product to enterprise grade communications platform.
As we look forward, two things are going to happen. 1) Enterprise, which is growing strongly, is going to comprise a higher and higher share of overall revenue. 2) Online is expected to stabilize in H2 2023 at which time it will cease being a drag on overall revenue. Both of these things are going to serve to re-accelerate top line revenue growth above what analysts are currently extrapolating, in my opinion.
I think Zoom’s enterprise platform is being underappreciated by the market, which still doesn’t realize the breadth of products Zoom has rolled out. When Zoom became a verb, their only product with any traction was the video-calling software we’re all familar with. Over the past ~12-24 months though they have executed impressivley on a product roadmap which includes Zoom Phone, Zoom Rooms, Contact Center, Whiteboard, Team Chat, Calendar, and Zoom IQ for Sales. Enterprise customers can buy the whole suite of products in a bundled offering called Zoom One.
Zoom has evolved from a single product into an enterprise-grade unified communications (UCaaS — it’s a thing) platform that I think can compete effectively with the likes of Microsoft, Salesforce/Slack, and Cisco. They now have a suite of tools that can bundled and cross-sold to their video-only customers, and they are getting results with 115% net revenue retention from enterprise customers. This means each customer that spent $1 with Zoom in 2021 spent $1.15 in 2022 on average as they added new seats and/or new products. Thought of otherwise, as long as this persists you can expect 15% annual revenue growth from the enterprise segment without adding a single new customer.
Zoom Phone (which is four years old) is seeing the best up-take, growing 100% yoy, and will surpass 10% of Zoom’s total revenue in early 2023. This is such a compelling product for the enterprise because it is significantly cheaper than legacy on-prem solutions — think of those big Cisco phones sitting on office desks and in conference rooms — which have about $1,000 of upfront installation costs and cost $40/month/user to maintain. Contrast this with Zoom’s cloud-based solution that integrates voice, video and chat and has no up-front costs and starts at $10/month/user.
As more and more businesses migrate to the cloud, look to cut costs and evaluate their legacy communications platforms against a hybrid-work future, Zoom has a compelling offering in what I think will be a long enterprise tech upgrade cycle.
So that’s the business. What about the stock?
Zoom’s current market cap is $22B with $5B cash and no debt on the balance sheet. This is against free cash flow of ~$1.2B, so the stock is currently at 14x trailing FCF.
Zoom gets ridiculed for egregious stock-comp but the reality is they actually reduced shares outstanding over the past year through a $5B buyback which has been completed (there is currently no buyback authorized) and just completed a 15% RIF in January which will significantly reduce operating expenses going forward. They’ve guided total diluted shares outstanding to increase in 2023 from 304 million to 309 million, or 1.6%.
They are doing all the things you would want as a shareholder — profitable, buying back shares after a 85% decline in the stock, pristine balance sheet, reducing opex, and investing in the platform.
I’m long with a ~5% allocation of my stock portfolio.
For more research on Zoom, I recommend this.
Stacks: Unlocking Bitcoin
I had heard of Stacks (STX) before and kind of knew of it as “the only Bitcoin L2 with a token.” I had never dug into it but recently I came across a bullish thesis from Hal Press of crypto fund North Rock Digital on Twitter that I found compelling.
The TL;DR is Stacks will bring smart contracts to Bitcoin, allowing for things such as DeFi applications, NFT projects and stablecoins to be built on the Bitcoin base layer. It will also allow for a decentralized pegged Bitcoin asset, sBTC, which can be used in DeFi, turning Bitcoin from a passive asset to a productive one.
Full details are in the Stacks whitepaper, but through a novel consensus algorithm called Proof-of-Transfer or PoX, the Stacks blockchain both inherits security properties from Bitcoin and is also additive to the fee pool going to Bitcoin miners, i.e. the STX token is complementary to BTC and doesn’t compete with it. Stacks miners bid BTC on blocks to earn STX emissions, which creates additional demand for BTC. STX stakers (called “stacking” instead of staking) earn those BTC bids as rewards for participating in the PoX consensus and providing useful work to the network, validating transactions.
Cool bro, but why is number going to go up?
DeFi / NFTs / Stablecoins coming to Bitcoin. Think Uniswap and OpenSea, but running on Bitcoin instead of Ethereum.
All built on Stacks.
“Nakamoto” technical upgrade anticipated in H2 2023 will increase transaction throughput to enable a lot of this to scale, and might drum up attention and a positive narrative ahead of the next Bitcoin halving event in Q1 2024. Catalysts, bro.
Only Bitcoin L2 with a token, so anyone that wants exposure to the “Bitcoin L2” thesis only has one asset to buy.
STX was distributed to the public in the first ever SEC qualified token-offering, so it has followed the path of legal compliance and public disclosure from the start — surely a nice-to-have in today’s environment when regulators look poised to pick winners and losers.
Listed on Coinbase.
Disclosure: I bought a small amount of STX to play around with (bought a .btc domain for 2 STX, find me at zackm.btc). I currently have no material exposure, but I plan to take a 50 bps position soon.
I typically target about 5% of my net worth to allocated to alt-coins (i.e. not BTC or ETH) spread across ~10 bets — thus 50 bps each.
Bitcoin Bearish, Stocks Bullish?
I just finished reading Soros so I’ve been leaning a little more into technical analysis lately and the action got exciting in the stock market this week at some key technical levels.
In my view the S&P 500 broke out of a 13-month downtrend in January and had formed a new upward sloping channel from the October lows. I poured on the risk end of Jan when we broke the downtrend, so I was feeling quite squeamish on Thursday morning when we opened below the channel and it appeared we were falling back into the downtrend.
Alas, the bulls made a kick save with two massive green candles to close out the week and keep us in the channel and, with real-time inflation indicators continuing to fall, I think there’s room overhead for stocks to run here.
Zoomed out to 2020:
BTC, on the other hand, is not cooperating. It similarly had a bullish breakout of the bear market downtrend in January and looked to be forming a new bullish channel, but it failed resistance at the May 2022 spike low of $25,388 and the news Thursday night of the impending Mt. Gox distribution sent the price definitively below the channel.
Creditors from the Mt. Gox bankruptcy in 2014 will receive distributions of ~$3 billion worth of BTC (141,000 BTC) beginning on March 10 and continuing through October. The news sent crypto prices down about 5% in minutes on Thursday night and they failed to recover in sympathy with the stock market rally on Friday.
BTC in particular faces some other headwinds here in the short-term. Silvergate bank is teetering on the edge of receivership, and they hold the MicroStrategy debt. If their accounts are taken over by another bank, that bank can decide to call Saylor’s loans, which may force a sizable BTC liquidation. At the same time, there is growing speculation that Washington is determined to crack down on crypto through restricting access to banking, and in particular energy intensive proof-of-work might face a renewed round of attacks as politicians attempt to prime public opinion for a confrontation with energy-intensive AI applications.
Add it all up and I’m reducing BTC exposure to add stock market exposure here, and I also think ETH could see some inflows coming from BTC over the coming weeks.
To be clear, these are just relatively small moves around the edges of my core, long-term positions. I’m still irresponsibly long BTC.
What about the Microsoft risk? Zoom and Slack have both had growth slow as more traditional end market clients (e.g. finance) never adopt their platforms but instead just use Teams, which already integrates with Outlook etc and comes free. (We switched from a combo of Webex & Zoom to Teams in 2021.) You mention Zoom building out the suite:
"I think Zoom’s enterprise platform is being underappreciated by the market, which still doesn’t realize the breadth of products Zoom has rolled out. When Zoom became a verb, their only product with any traction was the video-calling software we’re all familar with. Over the past ~12-24 months though they have executed impressivley on a product roadmap which includes Zoom Phone, Zoom Rooms, Contact Center, Whiteboard, Team Chat, Calendar, and Zoom IQ for Sales. Enterprise customers can buy the whole suite of products in a bundled offering called Zoom One."
This rollout comes across as "oh shoot we realized too late Microsoft has an incredible moat and now we are trying desperately to compete with Microsoft by building a broader suite" - I know that my company would never switch from Microsoft (too entrenched with Outlook/Excel/etc) - are there end market industries for which the Zoom suite actually makes more sense than the Microsoft suite?
Interesting writeup, as usual. But why would people pay Zoom when Google Meet, Skype, Facetime, What's App and more are all free?