“The pandemic has supercharged a battle over the future of business computing, pitting Microsoft against a growing list of rivals.
More is at stake than chatting over video calls. Chief Executive Satya Nadella has hailed Teams as critical to Microsoft’s future, in essence, a new operating system that would serve as a hub for the company’s more famous products such as Word, Excel, and PowerPoint.” Per the WSJ.
Companies aren’t messing around (see the ad below).
Cisco’s Webex product competes with both Microsoft and Zoom. And they’re taking direct aim at Zoom with the headline and the video-bombers comment (purple highlight).
Questions I’m chewing on:
- Can Microsoft ($MSFT), the bundler, beat focused players like Zoom ($ZM) and Slack ($WORK)? Can they make a good-enough-copy of Zoom and Slack’s core features that customers will use an inferior product and place more value in the bundle?
- Or, is the market big enough to support all three?
To get started, let’s go over each company’s goal and value props. This helps us see what each company is trying to accomplish and what job-to-be-done they are solving for.
👉A value prop (VP) is a product’s quality, matched with a benefit.
For example: Quality: Fast, Benefit: Quicker output, Value prop: Get work done faster.
Smart companies have their value props listed high-up on their home or landing page.
Microsoft Teams: Part of the Office 365 bundle
Microsoft’s goal: To make businesses productive and efficient through software.
Office 365 value prop: Productivity software in one place. No need to use different companies for each function. They offer it all in one simple subscription.
- Word, Excell, PowerPoint
- OneNote (note-taking)
- OneDrive (file storage)
- Outlook (email)
- Teams (chat, calling, collaboration)
Zoom’s goal: To make video communication frictionless.
Zoom’s value props:
- Consistent experience
- Can handle high volume
- Easy to use
- Affordable, simple pricing
Slack’s goal: To replace email inside a company👇
Slack’s value props:
- Keep conversations organized
- Essential information at your fingertips
- Helps you focus on what’s important
I don’t believe in absolutes
This story is framed as a battle. And while there’s some truth to that, I think all three companies can thrive. In my view, it’s a clash between the bundler, Microsoft, and a la carte solutions from companies like Zoom and Slack.
At the poles, some companies will prefer the bundle, and others will choose a la carte solutions. And then there’s everything in between. It’s not always one or the other. Companies can use both Teams and Zoom or Slack.
The situation is similar to the entertainment options we have today. We subscribe to Comcast (bundle), Hulu, and when Billions is on, Showtime (a la carte). Others said bye-bye to cable and use Netflix, Hulu, or a combination of OTT (over-the-top) services.
Even though all three companies sell collaboration software, they each solve for a different job-to-be-done. The specific classification for their products is called UCaaS (Unified Communication-as-a-service). This market is projected to be worth ~$75 billion by 2024, so there’s plenty of room for all three to create and capture value.
We’re bullish on all three companies and will be looking to buy on dips.
What are their charts saying?
All three stocks are outpacing the S&P 500 YTD. But Zoom’s stock has entered the stratosphere, gaining ~234% YTD.
Supply and demand:
Since December 2019, Zoom’s stock gone one way — Up! We wouldn’t chase these prices but would look for demand on a dip to $160.
Supply and demand:
Slack failed to regain a foothold above its IPO opening price (red line) at $38.50. Look for demand at $30, then $26.
Position? Thinking about it…
Supply and demand:
Microsoft is trying to hold above its previous all-time high at $190.70. We wouldn’t chase these prices and are waiting for a pullback to $140.
Don’t let valuations scare you
SaaS companies are typically valued on a multiple of their revenue. Currently, Zoom trades at 74x TTM (trailing twelve months) revenue, which seems absurd. Slack is selling at 24x TTM and Salesforce ($CRM), the OG of SaaS, trades at 8.7x TTM. What’s going on?
Well, in the recent quarter, Zoom’s revenue was up 169% year-over-year. And its forward twelve-month revenue multiple sits at 31x, which is not unreasonable given its growth rate.
Granted, COVID-19 pulled a chunk of revenue forward, so it’s unrealistic to expect Zoom to double their revenue every year. But a 20-30% revenue growth rate for the next five to seven years is probable in my view.
This doesn’t mean Zoom isn’t overvalued, but I’ve never found high ratios — P/E, P/S, or others — useful in timing stock buys.
High growth stocks, whether B2B or B2C, are always going to seem expensive. I learned this the hard way. And let high P/E and P/S ratios scare me away from buying great companies.
Ask yourself this: Would you want to own Facebook or Amazon at ten times earnings? No way! If those companies ever trade at 10x earnings, that means something has gone wrong, and their competitive positions have been compromised.
Are we underestiming Peloton?
Howard Lindzon had an interesting take on Peloton ($PTON).
From his blog:
Peloton is both a Netflix competitor (attention and content), a social network, and potentially competes directly with Lululemon ($LULU) on clothing. Peloton has your attention to place products on the screen and will eventually do rewards for discounts on their products as you ride.
In Scottsdale, the Peloton store is directly across from the Lululemon store. It seems to me that Peloton can become Lululemon easier than Lululemon can become Peloton.
Also, from Prof. G’s blog:
Peloton attracts premier talent from top fitness studios to exclusively teach within the Peloton ecosystem. These instructors are poached from the likes of Soul Cycle, Equinox, and Barry’s Bootcamp.
Peloton pays instructors $500 per class (over 3x that offered by Soul Cycle and 9x Equinox) and awards instructors equity in the business, giving them a vested interest in the firm’s growth. In turn, instructors achieve celebrity status, some building social audiences well over 300,000 (Update: This account added ~166k followers in the three months since March).
My thoughts: Peloton was the first company to combine workout equipment (a bike) with an interactive class. Workout apps and wearables like Fitbit watches were the early versions of “connected fitness” products, but Peloton has kicked it up a notch.
I’ve struggled with Peloton. I’m guessing it has to do with my negative biases towards fitness products. Namely, most turn out to be fads.
But the people I know who own a Peloton, LOVE IT. My question is — will they love it a year from now? Two years from now?
For me, figuring out this answer is critical for assessing whether or not it’s a fad or a durable, category dominating business.
Here are two lines of thought I’m working through:
- Is Peloton’s value prop so compelling that fitness nuts will permanently replace their gym membership with a Peloton membership?
- Can Peloton attract and retain people that have historically had trouble sticking with a workout routine?
- This is a biggie. I fall into this camp😒 I’ve tried gyms and various workout equipment before, but I couldn’t stick with it. I imagine this is the case for millions of Americans. If they can hook this segment of customers, I’ll be impressed.
Further reading: Collective Sweat (The Verge)