Facebook Should Buy Zoom
Why a strategic acquisition of $ZM by $FB makes sense
Introduction
Facebook’s user acquisition is slowing. The share price has been severely punished since they announced that user numbers shrank for the first time in their history. When they service half of the world’s population (whilst banned in China), it was inevitable that numbers would eventually stagnate.
However, Facebook (now known as Meta) doesn’t need to add more users to grow. They have barely innovated in a decade. They are a copycat and strategic acquirer. Reels videos, their most recent add to the Facebook and Instagram platforms, is a direct rip-off of TikTok. Stories copied Snapchat’s success. The only reason a younger generation remains engaged with the company is Instagram’s success. This is a company that acquires growth.
Mark Zuckerberg wants to build the Metaverse and Zoom may be the perfect on-ramp to do so.
The Zoom Narrative
Zoom’s share price has experienced a precipitous 83% fall since it’s $559 highs. With a 5 year CAGR of 132% for revenue and at an EV/EBIT of 28, Zoom looks positively cheap.
The narrative around Zoom’s share price decline post-Covid is that revenue is stagnating. This is simply not the case. Zoom expects revenue to increase to around $4 billion in 2022, up almost 50% on the prior year.
The world may be re-opening, but it is not going back to they way things were before. Zoom has increased revenue rates for businesses with more than 10 employees for 14 consecutive quarters. Not only is this a business with recurring revenue, but it is growing.
Zoom Phone, their conference call software, has approximately 2 million users and offers VR functionality through Oculus, to allow teams to collaborate as if they were in person.
A Strategic Integration
An acquisition of Zoom makes perfect strategic sense. It would aid three key Facebook targets; user acquisition, revenue diversification and act as an on-ramp to the Metaverse.
Historically, Facebook has generated 98% of revenues from advertising. This is a real point of contention for investors who compare it to the diverse revenue of Google, Amazon and Microsoft. An acquisition of Zoom adds at least $4 billion of high-margin, recurring revenue.
Facebook is no stranger to video. Their hardware and software includes Messenger Rooms, Facebook Portal and Ray-Ban Stories (Facebook Glasses).
In August 2021 they launched the beta version a Horizon Workrooms, a direct Zoom competitor that incorporates VR. Facebook Portal was a Covid success story, with approximately 2 million sold during the pandemic. Portal allows users to take part in video calls directly from their TV. Ray-Ban Stories are smart glasses which record video and audio, delivering the content to the Facebook app.
Zoom’s technology is frankly better and easier for users to adopt than it’s competitors. Zoom is still one of the world’s most used apps, with 300 million downloads in 2021. It would instantly provide access to a body of users Facebook deeply covets, the workplace. Facebook has been targeting the workplace audience for a number of years. Facebook for Workplace launched in 2016 and is a direct competitor of Slack. According to CNBC, Workplace surpassed 7 million users during the pandemic, up 40% the previous year.
A significant part of human interactions take place between 9-5, it makes sense to bring the Metaverse to the workplace. Mark Zuckerberg is betting Facebook’s future on the Metaverse. Reality Labs, the segment of the business in charge of Facebook's AR & VR plays, made a loss of $10 billion in 2021.
Zuckerberg expects users to be strapped into the digital oasis via the Oculus hardware. Does it not make sense to allow users to dip their toe using familiar Zoom software? On a recent episode of Invest Like the Best, Bill Gurley discussed why he is sceptical that Facebook's digital avatars will be broadly adopted, whereas live audio communities, such as Zoom and Discord, are more likely to act as the foundations for the Metaverse.
It’s argued by Zoom bears that the product has low lock-in, when similar platforms offer the same service as part of their bundle (Microsoft Teams & Google Meet). The integration of Zoom to Facebook’s family of apps and hardware would allow it to reach 3.5 billion users, cementing its position as the go-to video conferencing software.
Is It Feasible?
Zoom shares are near their IPO price. At a $29 billion market cap, Zoom is affordable. With $47 billion in cash and short term investments, Facebook could pick up Zoom tomorrow without breaking a sweat.
What would hinder any form of acquisition are government regulations. Facebook is no stranger to controversy, the Cambridge Analytica Scandal resulted in Zuckerberg appearing in front of Congress, whilst implications from last year's leak of the Facebook Papers resulted a sharp share price decline. Zoom’s explosive growth resulted in the Department of Homeland Security raising concerns that the platform is a “target-rich environment” for government spy services and other hackers.
The UK advertising regulator ordered Facebook to sell $315m acquisition, GIPHY in 2021, due to its monopolistic tie-in. Facebook is a government whipping boy; when they struggle to purchase an app used for making GIFs, it’s highly unlikely they would be granted permission to acquire a $30 billion, data-sensitive, video platform.
Conclusion
At the current share price, I would be surprised if there was not some form of acquisition attempt for Zoom in 2022. Buyers are just as likely to include Apple, Microsoft or Google. Adobe, Oracle or Salesforce could be possible outliers.
However, a Zoom acquisition by Facebook makes sense. Facebook has almost two decades of acquiring and scaling new apps, Instagram and WhatsApp are testament to that. In a post-Covid world, when user growth is beginning to slow for both businesses, a merger could be the best option to ultimately carve out the Metaverse.
-DB
(This write up is just for fun and not to be taken seriously. DYOR)
Send this to Zuck, pronto!