Whitney Tilson’s email to investors disucssing that Zoom is not the next Amazon, and is a good short.
Q2 2020 hedge fund letters, conferences and more
Your Last Chance To Watch Our Big Event
1) On Wednesday, I hosted a special event with my colleagues Enrique Abeyta and Berna Barshay.
For the first time, I shared on camera my big prediction for the outcome of November's upcoming election and what effect it could have on the stock market. We discussed which sectors will break out (or break down)... and we even shared the name and ticker of a stock that has the potential to double from here.
If you missed the event, you're not too late – a replay is still available. But don't delay... The whole thing goes offline tonight at midnight. Watch it right here.
Doug Kass: Zoom Is A Good Short
2) I think my friend Doug Kass of Seabreeze Partners is probably right that Zoom Video Communications (ZM) is a good short here.
It's a great company, and I love its video-conferencing services. But Zoom has many competitors, so I don't think it has much pricing power... and the valuation is truly absurd (a $132 billion market cap, equal to 105 times trailing revenue). Here's Doug...
Zoom Is Not the Next Amazon
* Last night, I shorted Zoom at $497/share
The newest "shiny object" that the retail investors are gravitating towards is Zoom.
It is always interesting to me to observe that the more a stock like Zoom rises, the more popular it becomes.
But, to me, the most amazing thing is not the parabolic nature of Zoom's price chart – it is the size of the company's market capitalization relative to other healthy, growing, and larger tech companies.
Zoom is now worth close to $150 billion.
By contrast, Microsoft (MSFT) is worth $1.5 trillion (and, to me, is not cheap at 30x EPS which is about the highest multiple it has had in recent times).
Apple's (AAPL) market capitalization is $1.8 trillion and is also very pricey at ~30x EPS for a low growth business.
On a last quarter reported basis, ZM had $328 million of revenue, MSFT's sales are $38 billion, and Apple has $60 billion in sales.
Zoom's Market Cap Is Larger Than Apple And Microsoft
To put that into perspective, Doug notes that Zoom has less than 1% of Microsoft and Apple's revenues... yet its market cap is 10% and 8% the size of those two tech giants! More from Doug:
So $1 of ZM revenue is being capitalized at 11.6x a dollar of MSFT revenue, and 14.5x a dollar of Apple revenue.
Granted ZM is growing faster right now. That is where the good news ends.
Here are the pricing plans for ZM.
Zoom as a product is incredibly cheap, which partly explains the rapid uptake. I am not sure how big this company can be. It also seems like everyone is using Zoom right now. This quarter they are currently in – which should be another blowout as implied by the price action – could be close to about as big as they can be, or at least at the point where the growth rate will materially slow.
Then the market is being priced for COVID going away at some point and things getting back to normal. That means at some point ZM by definition will have to be a shrinking company. At that point, on the other hand, a company like Microsoft should see growth re-accelerate.
I also doubt whether ZM, can earn anywhere close to the margins Microsoft and Apple earn.
Moreover, in the fullness of time, what ZM does is not hard to do, and there are already equivalent competing products from big, well-heeled tech companies like Alphabet (GOOGL) and MSFT.
This is more about the absurdity of the amount of market cap being ascribed to a company like Zoom.
We have recently seen how fast the air can come out of some of these things, like Nikola (NKLA), or said another way, how companies with little in the way of fundamentals can trade up to absurd amounts of market cap.
I am not even sure how you get there with Zoom if you even try to tell the fairytale story. The company's market is of limited size at these price points, the earnings potential is limited for this type of product, and the competitive risk is high.
$150 billion of market cap, and the fairytale story isn't even there. In fact, the fairytale is the world goes back to normal, and when that fairytale happens, Zoom's business will plummet.
I get why retail traders and some institutional investors are fascinated with Zoom, what I don't get is why every institution isn't saying "sold to you?"
Zoom is an example of 2000. I realized how absurd it was back then when Sycamore Networks, at under $500 million in sales had 2/3 of the market capitalization of Lucent, which had tens of billions of dollars in sales. We know how that ended. And it could very well end the same with Zoom.
3) This fascinating article from Bloomberg has many implications for investors: The Gambler Who Cracked the Horse-Racing Code.
4) Kudos to Bloomberg for this excellent piece of investigative journalism – tracking the Purdue Pharma blood money: How the Sacklers Shifted $10.8 Billion of Their Opioid Fortune.
5) At the exact opposite end of the moral spectrum from the Sacklers is Chuck Feeney – what an exemplar he is! The Billionaire Who Wanted to Die Broke... Is Now Officially Broke.
Best regards,
Whitney
