Zoom Discussion

103 All in all, we believe Microsoft’s internal strengths heavily outweigh their weaknesses and position the company in such a way that facilitates growth exceeding the 4,46% expected by the market.

Hence, we believe the stock was undervalued as of January 1^st, 2021 and would therefore label MSFT with a strong buy recommendation.

104 7.2.2 Revenue

In order to achieve the FCFF growth required to justify its stock price (19,90% annually for 10 years), Zoom Communications must also make the most of its resources given the market conditions the company competes in. Finding a valuable reference point is challenging for such a young firm that has experience such extreme growth. For example, Zoom’s 3-year CAGR for revenue was 159,64% (Statista, 2021), and maintaining such growth over a 10-year period is deemed unrealistic. Therefore, forecasted growth in the SaaS industry is deemed as a more efficient benchmark when assessing Zoom’s implied growth rate. This industry growth rate is further discussed in the industry discussion and expected to be between 15% and 20% per annum. With this benchmark established, we can now discuss how Zoom’s capabilities position the firm for future growth in relation to the industry as a whole.

Even though we have declared Zoom’s historical performance to be an inappropriate proxy for future growth, it does tell us that the company has efficiently leveraged its strengths in order to create value. In particular, it shows that they have successfully utilized their resources to take advantage of the extreme market conditions caused by the COVID-19 pandemic and ensuing restrictions. Zoom’s significant increase in meeting minutes is partially a result of favorable COVID-driven market conditions that require socially distanced efficiency. Businesses, consumers and investors alike quickly realized that Zoom’s existing platforms and freemium products could facilitate this efficiency, which drove the company’s initial success during the pandemic.

The company’s skyrocketing revenue indicates that Zoom has since successfully converted a large part of their freemium users into paying customers. A large part of this customer retention (and freemium conversion) can be attributed to the product’s quality and ease of use. Using their freemium pricing model as an enticing tool to attract first-time customers, Zoom has then relied on the product’s quality and ease of use to incentivize the purchase of one of their three paid subscription plans. Again, the extreme increases in revenue suggest that this approach has been successful. In addition to the product itself, Zoom’s superior customer satisfaction is what makes us believe that Zoom can live up to the market expectations. Whilst strongly correlated with the product quality and ease of use, Zoom’s customer-centric approach and resulting customer happiness is what has driven their growth in the past and will continue to be a key driver in the

105 future. Being a result of multiple factors and strategic choices, customer satisfaction indirectly reflects the probability of retaining customers and converting them to the paid tiers of Zoom’s services. We therefore deem the sustained nature of their customer satisfaction as outlined in the VRIO to be a strong fit with their freemium pricing strategy and the market conditions. All in all, Zoom’s resources are well suited for the external environment and customer needs, which is why we believe they will achieve the growth needed to justify their stock price.

As with Microsoft, there are certain factors that could invalidate this prediction. Zoom faces similar risks associated with cybersecurity and hacking, and a failure to manage these risks would obviously impede growth significantly. In addition, Zoom is much less diversified than for example Microsoft and all revenue streams link back to their conference solutions through either subscriptions or the promotion of hardware products. This “all eggs in one basket” approach worked wonders when online communication became the norm but makes Zoom vulnerable to a reversion to normal life with physical interaction and face-to-face meetings. Although normality will not be restored in the immediate future and videoconferencing has come to stay, there are some limitations when it comes to the growth potential in the industry assuming that remote working will not be the only alternative going forward. Questions regarding market saturation should be discussed and it is questionable whether the demand for videoconferencing will increase further (certainly not at the rate which it has in the last year). If this is the case, further growth can only be achieved by taking existing market share from competitors or increasing overall consumer demand, which would likely require product improvements and/or diversification. Again, we believe Zoom’s strong position in the videoconferencing sector will enable them to grow at 19,90%

for 10 years, but this prediction is based on the assumption that remote working and the need for socially distanced efficiency will continue to have a strong impact on business and everyday life.

Again, a failure to manage key weaknesses and/or external threats will have damaging effects on stock price and subsequently impact the implied growth as depicted in the sensitivity analysis. On the contrary, the future may show that our assumptions were slightly conservative. These exact effects are difficult to predict and quantify, but the sensitivity analysis intends to capture this uncertainty. As we believe 19,90% annual growth represent a realistic prediction for Zoom’s business potential, changes in WACC and/or terminal growth could alter our conclusion in either direction.

106 To conclude our discussion regarding Zoom, we deem their internal capabilities to be a god fit with the external environment the company operates in and therefore presents solid growth opportunities. More specifically, we think the company’s strategic choices facilitates growth similar to the 19,90% implied by its stock price. In other words, we believe Zoom’s share was fairly priced as of January 1^st, 2021 and would label ZM with a hold recommendation.