Sunday, April 21, 2019

Hiding in Plain Sight

In computer software and media, an Easter Egg is a hidden message, or an intentional inside joke. Such secrets can be found in computer programs, video games, or in movies. Disney Movie Easter Eggs will probably change the way you think about your childhood.

Many times in life (and in business) the most important things are hiding in plain sight.

Shares of Zoom Video Communications (NASDAQ: ZM) soared on Thursday. After jumping 80% at the outset of the IPO, shares finished the trading day up 72% at $62. This put the stock significantly higher than the $36 price tag Zoom put on its IPO on Wednesday, the day before shares started trading.

This amazing debut gives Zoom an impressive $16.2 billion valuation, and puts their CEO Eric Yuan in the spotlight as a freshly minted multi-billionaire.

Zoom is not your average IPO. Revenue is skyrocketing. The company's business model shows clear signs of scalability. 

What drove this massive interest?

Zoom is one of the rare breed of companies that was already profitable when it made its public debut. Buying into an IPO is already a risky venture, as these IPO companies don't have a public track record.

It isn't just profitability that attracted investors to the company. Zoom is also generating significant cash flow. Net income came in at $7.6 million, up from a loss of $3.8 million in 2018. Zoom's business structure was also a factor in the demand for its IPO shares. Zoom operates on a software as a service (SaaS) model, providing cloud-based video conferencing services. This type of business is less dependent on one-time sales and generates a great deal of recurring revenue, which puts the company on a stronger financial footing.

Even in the wake of strong investor demand and a significant price run-up on its first day of trading, Zoom will have much to prove in the months and years ahead. While investors are enamored with the company today, Zoom will need to prove to investors that it can continue to maintain strong financial performance. Other newly minted public companies are extremely volatile in the short term and could come crashing down as quickly as they skyrocketed. Lyft is a great example - that stock ended its first day of trading up nearly 9% but has since fallen more than 25%.

I will never give anyone investment advice. I can however, share my observations, and I do have an opinion. I really don't know of anyone who does not have a working Gmail account. I predict the same will happen for Zoom. Just as people now say "Google it" you will soon hear people say "Let's Zoom" as Zoom will soon become a verb. Again, my humble opinion.

I have hidden many Easter Eggs in this blog post. I hope that you can find time to read them.

In the beginning all businesses are just people playing out an idea. It's never the other way around - there is no idea so big that it doesn't need good people to make it succeed. Investors know this, hence the saying "Bet on the jockey (founder), not the horse (idea)."

A great jockey is a great role model.

Yes, many times in life, the most important things (and the best investments) are hiding in plain sight.

Happy Easter, Happy Passover, Happy Spring Everyone!

No comments:

Post a Comment