Zoom Video Communications (ZM) has become the poster child for the work-from-home economy, and my house is no exception. My wife teaches a class on Zoom and holds a weekly Zoom happy hour with friends. My daughter is Zooming to college. I unfortunately had to Zoom into a memorial service a few weeks ago.
Yes, Zoom has become a verb. It’s also become an absurdly expensive stock . At a recent close of $150.06, the company had a market value of $42 billion, some 45 times this year’s estimated sales.
At that valuation, the stock makes sense for only the most speculative portfolios. Fortunately, there are ways to play our new stay-at-home economy at far lower multiples of sales.
I’m particularly intrigued by the content-delivery networks, a group of companies that help balance loads around the internet, while providing security services for content and e-commerce firms. The CDNs are hardly household names, but their services are crucial in keeping the internet running smoothly.
The biggest public player is Akamai (AKAM), up 22% on the year. The stock hit an all-time high this past week, but relative to Zoom, Akamai’s valuation remains modest. It trades at less than six times estimated revenue for this year. And the outlook looks bright.
Akamai CEO Tom Leighton said at a virtual customer event recently that the company had seen a 30% jump in traffic in March from February, with peak traffic doubling to historic levels.
This past week, RBC Capital’s Mark Mahaney upped his estimates on the company to reflect “our more bullish view of internet traffic and accelerated adoption of remote access, of which we believe Akamai would be a direct beneficiary.”
Cloudflare (NET), the newest addition to the CDN sector, went public last September at $15 and has since rallied 40%, setting a new high this past week, as well.
In an interview with Barron’s, Cloudflare CEO Matthew Prince said his company has taken steps to ease the onboarding process for new customers. Prince says Cloudflare and other infrastructure providers have helped customers handle the spikes in online activity, smoothing the shift to home-based work. “The heroes of this crisis are the medical responders and scientists, but the cloud is like the faithful sidekick,” Prince says. “Had this happened 10 years ago, we’d all be in a lot worse shape.”
The document storage companies have largely been ignored in the scramble for work-from-home plays, with both Box (BOX) and Dropbox (DBX) trading for roughly three times 2020 estimated revenue. But the value of their services is underlined in a work-from-home world.
Meanwhile, Zoom’s success has overshadowed other communications companies that have become newly relevant.
RingCentral (RNG), an internet-based telephony firm, recently unveiled its own videoconferencing service , replacing the licensed version of Zoom it was selling.
RingCentral rivals Vonage Holdings (VG) and 8x8 (EGHT) are also pushing hard on their video services. Both have been around for a long time—I wrote about them in a May 2004 Barron’s cover story about the rise of internet-based communications. Vonage and 8X8 don’t have Zoom-like growth, but they don’t have a Zoom-like valuation either. While Vonage is forecast to have more total revenue than Zoom this year, it’s market value is less than 1/20th of Zoom’s.
Vonage says that its peak video traffic soared 435% in March from the level a month earlier. 8x8 CEO Vik Verma told Barron’s that his company has seen monthly active video users spike from about 150,000 before the virus to more than 13 million today. “Adoption has been awe-inspiring and tragic at the same time,” Verma said in an interview conducted via 8x8’s video platform.
Verma thinks the current crisis will trigger a “seismic shift” in the way companies handle communications. “It’s become a board level topic,” Verma says, in the same way that network security took center stage a few years ago following a series of high-level corporate hack attacks. He thinks we’re headed into a period in which physical offices will fade in importance, and companies will be defined by their communications backbones. “If you have a communications platform you can be effective,” he adds. “A building is nice to have,” but not a necessity.
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