A recent article claimed that Zoom was worth more than the whole of the US airline sector. This is not of course true, but it is interesting for other reasons, not least because we have recently discussed both areas.
Firstly, Zoom is not worth more than the airline sector, it just has a market cap that is higher. This is not to be pedantic, rather it highlights a number of other important issues, in particular the difference between Market Cap and Enterprise Value (EV) which adds net debt. Zoom has an EV of $47bn, nearly all equity, while the EV of American Airlines alone is $38bn, nearly all debt. As previously noted, over the last 6 years, the big 4 US airlines have added $38bn of debt and used it to buy back $42bn of stock, including over $350m of stock that the 4 CEOs issued to themselves at zero and then sold back to their own company at exaggerated prices.
The financialisation of western markets has to a large part been facilitated by metrics that, luckily for Senior Management, ignore Enterprise Value and just focus on Market Cap. In the past we used EV to EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) as a way of measuring management value added, but the recent trend of simply focussing on market cap based measures such as Market Cap to Earnings or Price/Equity allows management to use the balance sheet to hit earnings targets and reward themselves. It’s the equivalent of taking out a second mortgage to go on holiday and not acknowledging that the value of the equity in your house has gone down. There is a reckoning coming for such companies and their investors. This debt will be paid off most likely by issuing more equity and diluting existing equity holders.
Meanwhile, Zoom looks to us a lot like 3D Systems, the classic hype stock around 3D Printing. In 2010, 3D systems (DDD US) had a market cap and EV of around $240m, by December 2013 that had reached almost $10bn. Today it is valued at around $850m, still 3 x your money, just not 30x.
The EV/EBITDA of Zoom is currently at a classic bubble rate of around 1300x, as it is currently right in the peak of the Hype phase and with liquidity controlled by its private equity masters it is being pumped up by what looks like private clients following a Peter Lynch type strategy of buying ‘stuff they use’. Even using predicted EBITDA 2 years ahead it is still on 300x. Looking at the 13F, Morgan Stanley has appeared as the largest holder with over 10%, or more than 13m shares across a number of portfolios, almost all added in the first quarter of this year suggesting this is a private client ‘theme’ stock in the same way that DDD was. Valuation doesn’t seem to matter, nor does the fact that Microsoft, Google, Facebook etc all have competing and, in our opinion, better products nor that, true to Silicon valley form, money appears to be being spent on advertising rather than product development. Presumably the idea is to sell on to one of the big guys. We also note that the management have recently sold all their stock.
Currently Zoom has a lot of momentum and a boost from ‘thematics’, so its share price will doubtless keep going up until it doesn’t…Then it will reset, perhaps to a mere ‘normal’ tech level of around 30x 2021 estimates – where DDD is at the moment – rather than the 20x that Amazon trades on, let alone the 10x where American Airlines is on 2021 estimates. That’s OK, that’s only a 90% drop.
