Will Zoom’s $15bn purchase help it expand?
The videoconferencing platform became a household name during the pandemic, but it now needs new sources of growth. Alex Rankine reports
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”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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”.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Regulator moves to protect access to cash amid branch closures and disappearing ATMs
News The Financial Conduct Authority has told banks to start assessing if local communities have adequate cash access from mid-September
By Marc Shoffman Published
-
VAT hike on private school fees could come earlier than previously expected
The government could start charging VAT on private school fees as soon as January 2025, according to the latest reports. What does it mean for parents?
By Katie Williams Published
-
UK mid-caps: an improving outlook
UK mid-caps have perked up and the rally may run further, but long-term investors should remain selective
By Cris Sholto Heaton Published
-
The tobacco industry is going smoke-free - how to profit from it
Tobacco companies have realised their traditional products are on the wane. But new opportunities have opened up – and should prove lucrative
By Rupert Hargreaves Published
-
Is it time to invest in creative industries?
Any industrial strategy should not overlook the creative industries, one of our top national assets
By David C. Stevenson Published
-
Is Mercia Asset Management set for success?
Mercia Asset Management helps the government fund smaller companies in Britain’s regions. Should you invest?
By Rupert Hargreaves Published
-
British stocks set for a boost
British stocks are due for a bounce as the UK looks more stable compared to many economies
By Alex Rankine Published
-
Ocado shares jump by a fifth
Ocado takes a turn for the better after attractive profit forecasts were announced
By Dr Matthew Partridge Published
-
The AI boom is on borrowed time
The hype around the AI boom could be on its way out – but why?
By Alex Rankine Published
-
Diploma: a blue-chip set for strong growth
Diploma, whose niche products include seals and fasteners, serves an array of growth markets. Should you invest?
By Dr Mike Tubbs Published