Will Zoom’s $15bn purchase help it expand?

Zoom’s market value soared from $16bn to $100bn in the pandemic

(Image credit: © Zoom)

Video platform Zoom Video Communications has become a “household name” during the pandemic, say Rob McLean and Michelle Toh on CNN. Just two years ago it was valued at $16bn, but its market capitalisation has since soared above $100bn after millions of people turned to it for remote videoconferencing during lockdown. Now vaccines are allowing more people to get back to the office, so it needs to “find new avenues of growth”.

The solution is a push into the enterprise market. The firm has announced that it will buy cloud contact-centre specialist Five9 for “a whopping $14.7bn”. Five9 provides software to customer-service centres for over 2,000 clients worldwide. Five9’s software helps companies to streamline their customer service operations. It can be difficult for businesses to keep track of all the interactions they have had with a customer across text, phone calls, online chat and email.

Integrating artificial intelligence

Companies need help with “a multichannel approach” and are also increasingly using artificial intelligence in customer service, says Lex in the Financial Times. The $24bn cloud-based call centre service market is growing fast. Five9 could integrate Zoom’s videocalling technology: a customer with “a broken dishwasher” could “simply show the help-desk representative the problem via video rather than attempt a voice-only explanation”. Zoom has become “a proprietary eponym for video calls” since the pandemic began. Sales quadrupled to $2.65bn last year, but management knows that the growth spurt can’t be repeated. Remember that “Kleenex and Xerox... struggled to retain early dominant positions”.

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Zoom is popular with “everyday users”, but in the business market Microsoft’s Teams platform is breathing down its neck, says Dan Gallagher in The Wall Street Journal. This deal will give Zoom an extra selling point, allowing it to offer “a more robust portfolio of communication services”. The all-share deal is by far the firm’s biggest to date. Before this tie-up, Zoom’s largest ever purchase was valued at a mere $43m. The deal is a big bet, agrees Alex Wilhelm for TechCrunch. “The Five9 transaction is worth nearly 15% of Zoom’s total market cap; the company is betting a little less than a sixth of its value on a single wager.”

Zoom’s shares trade on a princely 70 times forecast earnings, says Pete Sweeney for Breakingviews. They have provided a “rich currency” to fund this all-stock deal. The trouble is that Five9 “is also exuberantly valued”. The business “has reported a net loss for the last five years” but is trading at 26 times forward sales, “one of the highest in recent software transactions”. Five9 is set to make earnings before interest and tax (Ebit) of $130m in 2023, yielding a measly “0.7% after-tax return” on the $14.7bn purchase price. Returns could be even worse if “well-heeled competitors” such as Microsoft pile into the sector with their own purchases. This deal could herald the start of “an expensive new battle over cloud-based conversations”.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.