Zoom Stock Pulls Back After Initial Run-Up | Summary and Q&A

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October 2, 2019
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Investor's Business Daily
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Zoom Stock Pulls Back After Initial Run-Up

TL;DR

Zoom, a software company with high gross margins, has a clearer path to profitability compared to hardware companies like Peloton. The IPO market pullback may affect smaller businesses, but larger, cashflow positive companies like Airbnb are less likely to be deterred.

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Key Insights

  • βœ‹ Zoom's high gross margins give it a competitive advantage in terms of profitability and operating leverage.
  • πŸ‘¨β€πŸ’Ό Software companies, like Zoom, have performed well in the IPO market compared to businesses with different margin profiles.
  • πŸ‘¨β€πŸ’Ό The IPO market pullback may impact smaller businesses more than larger, cashflow positive companies.

Transcript

quickly before we go I also want to touch on zoom because this is one of those more software focused companies that we did Seco public this year so what are your thoughts on that when you compare that it to more of like a peloton that's a hardware company yeah it's I I think investors can understand it a lot more easily you know it's a business wit... Read More

Questions & Answers

Q: How do high gross margins benefit companies like Zoom?

High gross margins allow for a clearer path to profitability as the company's ceiling on profits is determined by its gross margin. This also enables businesses to take advantage of operating leverage, cutting sales and marketing expenses for higher profitability.

Q: How do software companies like Zoom differ from hardware companies like Peloton?

Software companies have higher flexibility in adjusting their operating expenses to boost profitability, while hardware companies face more challenges in changing their cost of goods, which affects their overall margin profiles.

Q: How does the IPO market pullback affect the prospects of other unicorns going public?

The IPO market pullback may create some hesitation among smaller businesses, but larger, cashflow positive companies are likely to proceed with their IPOs if they have a strategic need or desire to go public.

Q: Can you provide an example of a company that is likely to pursue its IPO despite the market conditions?

Airbnb, a highly scalable and cashflow positive company with strong network effects, is a prime example. Despite potential risks, such as macro trends or weak post-IPO performances, Airbnb is positioned to go public within the next six to twelve months.

Summary & Key Takeaways

  • Zoom, a software-focused company, has high gross margins (over 75%) that translate to a clearer path to profitability and operating leverage.

  • Software or SaaS businesses, like Zoom, have been performing well compared to other businesses with different margin profiles.

  • Despite a pullback in the IPO market, larger cashflow positive companies like Airbnb may still pursue their IPOs, considering their strategic needs and market position.

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