What Will Zoom’s IPO Valuation Be?
Video communications provider Zoom recently filed to go public, reportedly seeking $100 million in proceeds. The company’s most recent funding round, a $115 million Series D in early 2017 led by Sequoia, valued it at around $1 billion. Zoom’s S-1 filing was noteworthy among recent tech IPOs – most notably Lyft’s – in that it revealed that the company has already achieved profitability, a rarity among tech “unicorns.” This profitability, coupled with the company’s massive growth in recent years, should allow it to price its IPO well above its Series D valuation, though the targeted range has not been reported.
Our interactive dashboard Estimating Zoom’s Valuation breaks down the company’s key value drivers and our forecasts for the near term, as well as Trefis’ valuation estimate for Zoom, which is around $6 billion. You can modify these metrics to arrive at your own estimate for Zoom’s valuation, and see more Trefis technology company data here.
Overview Of Operations, Key Metrics
Zoom generates revenue from subscriptions to its video communications platform. Basic subscriptions – which have limitations on the number of participants and length of meetings – are free, while revenues come from the company’s Pro, Business and Enterprise offerings. Subscription revenue is driven by the number of paid hosts, in addition to the purchase of additional services and products such as Zoom Rooms. Nearly 75% of Zoom’s recurring revenue comes from annual and multi-year subscriptions, allowing for improved visibility and demonstrating the stickiness of the company’s services.
Zoom breaks down its revenue as revenue from Business Customers (defined as customers with more than 10 employees) and non-Business Customer revenue. Both revenue streams saw growth in excess of 90% in the most recent fiscal year, while the company saw growth of 97% in total business customers last year.
Based on Zoom’s reported number of business customers and revenue, the average revenue per business customer comes out to around $5,000, and will likely increase going forward driven by pricing increases, improved uptake of premium services as well as newly launched products. We forecast continued strong growth in business customers – over 40% this year – albeit at a slower rate than in recent years due to the higher existing base. This growth will be driven by the rise of distributed teams and remote work, in addition to the company’s compelling offerings and strong brand. Overall, we forecast growth of over 50% in business customer revenue this year, in addition to growth of over 40% in non-business customer revenue. Our forecast for total revenue this year stands at just over $500 million, which would represent year-on-year growth of 55%. For reference, the company’s total revenue increased by over 100% in each of the last two fiscal years.
Zoom Is (Impressively) Profitable Already
As mentioned above, Zoom has distinguished itself from many of its peers in the tech “unicorn” club in that it has achieved profitability prior to its IPO, which should broaden its appeal to public market investors. The company’s gross margins have stood at over 80% for several years, while its operating income and net income reached positive levels last year. Its operating income of $6 million implies an operating margin of just 2%, but assuming the company can sustain its impressive revenue growth, its margins should expand materially in the coming years.
Based on our net revenue forecast of just over $500 million for this year, and our estimated revenue multiple of 12x, we estimate Lyft’s valuation at about $6 billion. This is well above the Series D valuation, which makes sense considering the sustained revenue growth and profitability. In fact, given that growth and profitability, a 12x multiple may end up being conservative, but we believe it is appropriate given the competition in the video communications space in addition to the relatively limited differentiation therein. You can modify the valuation multiple – or any other key forecasts – in our interactive dashboard to see the impact that any changes would have on Zoom’s valuation.
While it operates in a fairly competitive space, Zoom continues to see impressive growth as well as customer stickiness, driven by its focus on customer service and satisfaction. It has received numerous awards and recognition from organizations such as Gartner, and its net promoter score (NPS) of 70 indicates high customer satisfaction. It will be important for the company to continue adding new products and services and focusing on customer satisfaction, considering the competition in the video communications space. If it is able to continue executing on its vision, however, our 12x revenue multiple could end up looking overly conservative.
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