Zoom shares: Should investors buy lockdown champions?

Zoom Video Communications has seen its share price soar amid the coronavirus pandemic, but is it a buy? Alex Illingworth of Mid Wynd shares his thoughts on investing in lockdown champions.

Millions of people are learning how to cope with staying at home, embracing video conferencing technology or software to aid remote work collaboration. New names are entering our brand lexicon, such as Zoom, Houseparty and Slack.

Although we may miss face-to-face interaction with colleagues, not all of us will go back to commuting every day or travelling long distances for short meetings.

This is bad news for rail franchises; good news for providers of online chatroom facilities, perhaps. Companies such as Peloton, that offer exercise bikes and online spin classes at home, might also appear to be set to flourish in a post-lockdown environment. But how can investors exploit such changes?

Not all the companies coming to our attention right now are listed. Houseparty, for instance, is part of privately owned Epic Games, the makers of Fortnite – although they in turn are 40% owned by the Chinese entertainment conglomerate, Tencent, which is publicly listed (and which we bought recently).

Other more established companies, such as Skype, have already been snapped up by the giants - in this case Microsoft.

But some of these would-be unicorns, such as Zoom Video Communications, are available. As it happens, we met the management of Zoom (ticker: ZM) a few months ago, before the coronavirus crisis occured.

Our view, right or wrong, was that at this stage the business was not run with shareholders sufficiently in mind. The distribution of returns between external shareholders and management was outside our normal parameters and the generous introductory free pricing model is great for customers, but not for the balance sheet. Before you draw your own conclusions, or invest in any exciting new stock, may I offer an opinion?

The first is to do your research. It is staggering how many investors buy shares on the basis of a gut feeling and their own experience of using the products.

Zoom is one of the small proportion of shares to have risen during this crisis – 7% last month. Although many people have been buying it, many more seem to have been buying Zoom Technologies instead. This is a completely different firm, but with the ticker code “Zoom”. In the three weeks before the American regulator the SEC stepped in to suspend the share, it had risen 250%.  

As part of your research, consider a few general questions.

Is a firm breaking the mould or establishing brand dominance?

Video conferencing is not a new technology and there are plenty of companies providing these services such as FaceTime, Skype, Zoom, LifeSize, Houseparty, Teams, Hangouts, and Duo.

Companies such as Microsoft (Teams and Skype) and Google (Hangouts and Duo) have the scale and resources to add new features quickly if they feel competitors are encroaching on their territory. Houseparty offers an eight-person call, Google has upgraded Duo to 12; Apple FaceTime offers the chance to invite 32 people. Sadly, none have yet managed to find a way for everyone to talk and be heard at once.

Of course, if your provider does come up with a special feature or quirky niche brand, a giant multinational might buy them out – and there lies a genuine opportunity. But you face a lot of risk waiting. 

Will it ever be profitable?

Never lose sight of the need to generate profits. When digital cameras first emerged, cutting-edge manufacturers such as Fuji and Canon seemed attractive propositions. Kodak, still fixated on film, did not. However, it soon became clear that making digital cameras is not that difficult. Lots of companies were able to pile in. It was hard to establish dominance and it was hard to make money. The industry was over-competitive and profit margins were squeezed.

Peloton has been a fashionable stock in the past year. Their spin bikes sell from £2,000 each. They then enjoy a recurring income from offering £39 a month access to live spin classes through a screen on the handlebars. But there are a growing number of companies offering similar but cheaper online classes. Many of us are happy to buy a £300 bike and just fix an iPad to a music stand in front! And who needs a bike? My family have all been joining in Joe Wickes’ free weekday keep fit classes. It will be interesting to see how he – or others – monetise this trend post-lockdown. Smart investors look for barriers to entry or what we call “moats”.

Is there a better way of doing this?

If you think something such as video conferencing represents a step change in the way that we work (and we think it does), there may be a surer way of making money, by adopting a Levi Strauss strategy. Strauss established his business by selling blankets and clothing to the 300,000 gold prospectors who rushed to California in the 1850s. He certainly made more money than most of his customers.

So, within the Mid Wynd Investment Trust and Artemis Global Select fund we already held, or have bought recently, companies such Vodafone, Comcast, Nippon Telegraph and Telephone (NTT), and Verizon. These companies provide the telecoms infrastructure that generates the bandwidth for this technology to work effectively.

We have also bought China Tower, the Hong Kong-listed company providing aerial towers for the rollout of China’s 5G telecoms. This crisis may be a catalyst to speed up 5G rollout internationally. Another company we own that has done well for us is Equinix, the real estate investment trust that is the world’s largest data centre provider.

These are not glamorous stocks. Some are brands that you will not recognise. But in our experience, the most dependable way to make money is often the slowest and most unfashionable way.

Alex Illingworth is co-manager of the Mid Wynd Investment Trust.