Zoom reports 2020 third quarter earnings — sacrifices profitability for growth

Riding the wave of COVID winners is becoming a dangerous way to live. Zoom’s stock fell over 15% after announcing its third-quarter earnings results on Nov. 30.

Despite failing to meet investor expectations and falling as a result, Zoom’s stock is still up nearly 6x in 2020.

(Catchup: How did Zoom become the go-to video calling tool during COVID)

Zooming out of focus

Zoom is sacrificing profitability for growth and investors aren’t happy about it. The start of the school year increased the number of free users on Zoom’s service — and the cost of servicing those users dragged down Zoom’s profits.

• Moving up — $777.2m in sales, up 365% from the same period in 2019.
• Moving down — 66.7% gross profit margin, a measure of profitability, is down from 81.4% pre-pandemic.

It’s expensive to be generous and Zoom’s in a giving mood. As per Kelly, Steckelberg, Zoom’s chief financial officer, the free offering is an important part of Zoom’s ecosystem and strategy — converting free users onto paid plans over time.

The enemy of all subscription businesses

Churn, the rate at which customers unsubscribe, has become a growing concern amongst Zoom investors.

The company expects higher churn in the coming quarters — especially amongst customers with 10 or fewer employees, which made up 38% of total revenue. This number had nearly doubled from 20% pre-COVID.

These smaller customers are the most likely to stop using Zoom over time, or worse — stay on the free plan.

For investors… When others Zoom, you zag

Investors are beginning to see growth slow after Zoom’s tremendous year and it’s possible things could get worse from here.

Investors have begun to pull out of stocks that benefited from COVID lockdowns and shifted money into those that could benefit from a vaccine.

Taking a page out of Zoom… Stocks with upcoming earnings that could become a victim of its own success —- Chewy ($CHWY), Stitch Fix ($SFIX), GameStop ($GME). In Nov., J.P. Morgan released a list of stocks that could react negatively to positive vaccine news — might be time to rethink your holdings.

(Learn more: Life after COVID, which stocks could perform well in 2021)