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Is Zoom Sitting On Billions In Anthropic Gains? Plus, Why The Business Can Thrive During The AI Revolution, With Sean Emory (Ticker: ZM)
01:00:53
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- [00:00]
Ryan Henderson
This episode is presented by Interactive Brokers. You research your investments, but did you research Your Broker? In 2025, IBKR retail clients averaged a 19.2% return, beating the S&P 500's 17.9% over time. The broker you choose makes a difference. If you want to learn why, head on over to ibkr.com 2025 more on this later in the show.
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Sean Emery
Welcome to Chit Chat Stocks.
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Brett Schaefer
On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on.
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Sean Emery
The world of investing.
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Brett Schaefer
As a quick reminder, Chitchat Stocks is.
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Sean Emery
A CCM Media Group podcast.
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Brett Schaefer
Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is.
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Sean Emery
Not formal advice or recommendation. Now, please enjoy this episode.
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Brett Schaefer
Welcome into Chitchat Stocks, a podcast to help you find your next great investment. Today we have recurring guest Sean Emery from Avery and Co. Chief investment officer and also the, well, I'd say, who also runs the Avery Foundational ETF with the team over there. Today we'll be talking Zoom Video Communications, a company that many people heard about a lot in the financial media in 2020, 2021. It's fallen much more under the radar. Today we're going to be talking about the company, what they're doing in 2026 and yes, for as well questions around their anthropic investment. Before we get into the show, for any listeners interested in more of Sean's work and what they do over at Avery and Company, we'll have links in the show notes, so go check that out. There's a lot of interesting media write ups, all that good stuff on their websites. But first, Sean, welcome to the show. First question here. Many investors, they followed Zoom during the pandemic. They've probably since forgotten about it. Personally, myself, I haven't thought about it in a couple years now. What has happened to the company since the pandemic? Boom and bust.
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Sean Emery
Yeah, what's up, man? Yeah, reoccurring guests here love what you guys do. You know, Zoom was one of those names that I think people are all, you know, constantly knocking on our door asking why we didn't own it. You know, this was, you know, the Zoom era where everyone was zooming and, you know, it was the only thing you could do, you know, at one point in time and, you know, I think it surpassed, you know, 100, $150 billion of, you know, market cap on, you know, sub $3 billion of revenue. So, you know, you do those numbers there and you start to understand what, what possibly happened thereafter and you Know, think about that. You know, a lot of people took this thing up to 600 bucks a share from 60. You know, you 10x it, you know, you pat yourself on the back and, you know, since then, you know, the world normalizes. You know, you have some competitors obviously step in or, you know, improve their products. You had many of the other competitors as well, you know, fall off to the side and kind of become, you know, somewhat irrelevant, smaller players, let's say. And, you know, valuation comes in, platform starts to expand. At Zoom, you know, if you get burned by something, typically you. You shun it, you look away, you never look at it again. I think that's, you know, human nature. So you go back the last couple years, and I think that's ultimately part of the story. You had a big ETF shop out there that invests, you know, in innovation, let's say, that had a large position that they were getting out of, you know, worth hundreds of millions of dollars. So you had some of that pressure as well. So, again, it's one of those things where I think it gets forgotten, and underneath the surface, you actually have a company that is executing pretty well considering what had happened four or five years ago.
- [03:57]
Ryan Henderson
I think most people, we're going to talk a little bit about the business model evolution and some of the other stuff they've rolled out, but I think most people, they think Zoom, they think video teleconferencing or video service, and they think Microsoft Teams, Google Meets. I don't know if there's other. Cisco, Webex, I think is still a thing. And the logical question is, why would someone, why would a business choose Zoom over getting it bundled with their Google Office or Microsoft Office products and having it basically be cheaper through that bundle?
- [04:35]
Sean Emery
Yeah, I mean, there's a lot. There's a, There's a. That's a common question I hear, or feedback. And you've heard that for quite some time yet, you know, you've seen. So one way to look at it is, okay, well, is it happening? And if it is happening, you know, how is it showing up for someone like Zoom? And what you've seen since COVID obviously, is, you know, your, your natural instincts. When you looked at anyone that benefited during COVID you know, you saw a lot of normalization, meaning whatever they captured, they gave back to some extent. You didn't necessarily see that in Zoom. Right. They've grown every year since, at the same time, have held margins. Right. So I think those are two decent indicators that suggest, man, maybe something's happening Here that's allowing them to maintain, retain and then also maintain margin, you know, top line, bottom line. And part of the decay maybe on their online business, which is much more, you know, a single person, single shop, a fitness instructor that was once using it, you know, you had some of that normalization where people, you know, stop doing Zoom workouts, let's say. And the other side, which is really the enterprise business, is, you know, Zoom executing wonderfully there. And if you're an enterprise, let's say you're Intuit, which is one of their customers, and you compete against Amazon, you compete against Google, you compete against Microsoft in different ways, right? Just depending on what it is. You don't necessarily. Or they could be competition. How about that? At some point. And like, do you really want to provide them all your communication tools, your sales reps on calls? Look, we know there's, you know, guardrails in place and you know, the likelihood of them just sitting there in your, in your sales meetings is probably low, but it's possible, I guess. So what does Zoom have? They have their own data centers. So, you know, they have their own on premise data centers. They've been using their own data centers essentially since day one. And yes, for, you know, during COVID they had to go out and, you know, leverage some of the cloud native platforms because they just, they couldn't build data centers fast enough. Fast forward to today. That's, you know, another story again for, you know, different vendors out there. But you basically had a company that, you know, has privacy embedded in it from the data center level to the expansion of that platform as well. So you're going from a single tool to a platform and that platform encompasses things like, you know, meetings one to one. Think of the people that are using that. Part of the, the platform is sales reps. It is, you know, town halls. It is, you know, internal one or, you know, one to many meetings as well. And I think that is super important one to keep that information inside, but also, and keep it in like some sort of perimeter, but also the fact that it needs to be reliable all the time. Every time you want to know if you're a sales rep, the people on the other side are going to have access to your solution. You know, people still try to get me on a teams meeting. I still haven't downloaded on my desktop, partially because we're investors in Zoom, but partially because it's just not as intuitive an application for whatever reason. Um, and so there's some of that. So they've gone from meetings to then incorporating things like Team Chat, which is like a Slack product. We used to use Slack and we migrated to, to Zoom. So you know, think of the eight bucks a month we were spending over there per user, you know, we aggregated over there. So bundling the Zoom phone. So I have Zoom phone which is, you know, cloud based, you know, phone system. So if you call my personal line or my business line, it'll ring the same phone but you know, it'll be two distinct, you know, interfaces and then two distinct, you know, silos. Again, perimeter of my own personal and professional life. And then you have the contact center. Now if you're an organization and you're, you're big enough and you have a support staff over here, you have sales reps over here, you have your internal operation going on, you have your developers, you know, maybe they won't exist in 10 years according to the markets talking to each other and figuring stuff out. I think you're likely going to want to sit on one platform if you can. And it's reliable, intuitive and cost effective. And I think a lot of that is embedded in there and I don't think they're getting enough credit for it. When people ask about necessarily, you know, you could go to Microsoft and get their E3E5 product offering, which is what enterprises use and on an apples to apples basis there when you actually do a cost compare and at those levels, like the enterprise level, Zoom tends to come out cheaper because you go end to end off the stack. You have clips, which is, you remember the Tool Loom? I don't know if you guys remember the Tool Loom that got acquired by last year for like a billion dollars a couple years ago. You get that for free. Inside of Zoom, everyone's paying for Calendi and Calendar is a beautiful interface. You know, they did a really good job at making it very simple to use and, but you have Zoom Scheduler and it's actually a pretty nice interface. We use it here, I would say like the Googles, the Microsofts, their versions of all this stuff while they work and they're there, I'm not sure they're as professional as maybe some companies would, you know, appreciate sometimes. And therefore, you know, you have, you know, clips, which is their, you know, asynchronous kind of video where you, you know, give somebody a video quickly. We use it internally, you know, when we're kind of just trying to send something quick Team Chat again, which is slack. So you have all these interfaces and then, you know, we're probably Going to talk about AI in general, it's hard not to, but you know, AI is encompassing and touching all of these different, you know, parts of the platform. So I think cohesive, independent, all matter. And again, it's why Salesforce still exist. You know, Google could make that right in theory. Microsoft has Dynamics already and you know, people ask those same questions. But I think when you have a category and you're the leader in that category and define it, it's, and you're building a product suite that can help enrich your customers, I think ultimately you have a chance to survive and then thrive.
- [10:32]
Brett Schaefer
No, it is an interesting point where you do have companies that, or you have any company that could really make this product. And some companies have, but if you look at, they had these things 20, 20, 2021, 2022 and Zoom is still doing billions of dollars in revenue. Maybe my follow up for that. You talked about plenty of the products they've added here. But financially have they gotten adoption? Have they shown, you know, they've talked about enterprise going much quicker than individual. But of the Zoom phones of the world, the AI companion, the Contact center, what are the financials around that? And do you think that's helped them build a better, maybe protective moat, switching cost versus any of the competitors trying to, you know, give away some of this stuff for free?
- [11:23]
Sean Emery
Yeah, yeah, no, good question. So the, so without the additional products, this would have been a declining revenue business. Right. You would have been selling meetings and, and that would have been it. And so about five years ago they launched, you know, Zoom Phone started, launched, it was growing triple digits. Today it's at 10 million seats. Right. So it's the fastest growing cloud based phone system out there. Competing with RingCentral, you know, competing with, you know, 8, 8 and some of the other players that are out there competing with, you know, Microsoft as well with their, their product offering. But in general, you know, here's a company again that you know, or a product line that is, you know, probably they've, they, they give you disclosures every now and then. And so we know it's above 10% but we don't know if it's, you know, at 20. And so we can assume, you know, it's probably somewhere around 15% of revenue. And that's critical in terms of that because it's priced below its traditional meetings. So we know then it's capturing a little bit more of the actual subset of customers just given that dynamic. And then you have Zoom Contact center, which is newer, over the last call it three, four years roughly. And you know, the last indications that they gave there, you know, were high double digit meaning close to hundreds of percents in growth there. Now those are bigger tickets, you know, $79 per seat per customer rep with you know, some of the AI stuff embedded. And again that flow of interaction where you're saying, you know, support agent, send it to the sales rep, let's close this deal. Sales rep, it's going to auto call to the end client. You know, those things, those loops I think matter. And then speaking and communicating inside the team chat to tell your team, hey, we just want a deal or we're, you know, bring in the, the specialist, the product specialist. So I think that interaction matters. But the financials again, you know, I would assume, you know, and this is, you know, using much of their disclosures, you can ballpark around, you know, 16 to 20% of their revenues coming from those two product offerings. Now how is that showing up in other places which is you're seeing record low churn for the business and that's important as well. So again they continue to migrate upward deeper into the enterprise. The online business again is much more a product led growth story. Right. You just sign up online and that is, you know, a business that's flat, you know, that captured a lot of the share and the opportunity pre Covid during COVID post. Covid. Anyone that you know is spinning up a quick little business is there. So you have the enterprise business. The most important part, you know, they're wrapping a bunch of services and other offerings around communication to really create a platform for them. You know, they just want Amazon, they just want a Fortune 10, you know, financial institution. There's only two in there. So you know, it's either like J.P. morgan or bank of America. The fact that Amazon chose them for some of their services says a lot. And then, and then AI, I think you, you mentioned it, you know, how is that showing up in numbers? So it's not yet, right. The, the, the way I think it's actually showing up in numbers is, is churn because all this communication stuff that you're doing, whether it's voice, text, video, all of that is context. And that empowers, you know, AI. Without context, AI doesn't really do anything. And so there's context and we use it internally for our summaries, right? So like we'll have a call internally, we'll have a call externally, we'll have summaries post that like most people are doing this stuff but ultimately all that context matters and it lives in your Zoom platform. And you know, if you're using it then you know, it's, you're probably better off staying in that same platform. And they're extending beyond just like a summary. They have, you know, their workflow they call AI Companion 3.0, it started with 1.0 is basically just summaries. 2.0 was really, you know, customizing some of the AI interactions you can do on the platform. And then three like pretty, you know, pretty good agentic like workflow tools where you can do that inside the Zoom platform where I'm in there and I'm trying to create, you know, different workflows of like, okay, well I'm about to speak with, you know, Ryan on, on, on whatever about fiscal AI and you know, tell me like five things before the meeting starts so that I can, you know, be up to date and do that for these type of interactions. So they have this like workflow builder that I think is being built out. It's AI Companion 3.0 and they're starting to monetize, you know, some of these tools. So I think that's important in terms of like the next steps and how they'll potentially monetize AI. But it's showing up in churn. And I think that maybe the best.
- [16:13]
Ryan Henderson
Reflection that makes sense, we were recording this in February 2026 and at the moment it seems like software stocks pretty much across the board are struggling minus Zoom perhaps for another reason, which we're going to talk about in a second being the anthropic investment. But I guess the follow up here is do you see any sort of AI threat to the business? Like right now, I think with a lot of more like task management software, there's this concern that AI is making it much easier to displace these tools or build internally. Is there any risk that that happens? In the case with Zoom, you research.
- [16:57]
Brett Schaefer
Your investments, you analyze markets, you manage risk. But did you research Your Broker? In 2025, IBKR clients outperformed the S&P 500. Retail clients averaged 19.2% while hedge fund clients averaged 20 compared to the indexes 17.9%. IBKR's lower trading costs, competitive rates, efficient execution and access to more than 160 global markets helps investors keep more of what they earn and put more capital to work. Over time, the brokerage you choose makes a difference. If you care about performance, find out why the best informed investors choose interactive brokers@ibkr.com 2025 Interactive Brokers is a member of SIPC.
- [17:44]
Sean Emery
So I don't think as much with Zoom. I think communication is very specific. If you think about all the people using it and what you're using it for, I think some of that context is super vital, super important. I don't think I personally, I don't know about you guys, you know, you know, you guys have other things you do in life as well outside of chit chat stocks and you know, in general, are you guys building out your own, you know, video communication tool and relying on that for sales calls?
- [18:15]
Brett Schaefer
Not yet, no. We'll keep you updated if we do. Right.
- [18:19]
Sean Emery
So like, you know, I have a bunch of calls with, you know, leading companies that I'm asking them just, you know, simply. And then, you know, the other day I did a little scrape of all the job postings at all these AI labs and like they're all using third party tools and not to say that you can't stand up a task management product, but like, but why? Like, like if it works, the workflow works and they can, you know, add on layers of like AI to it and enhance and enrich like all the stuff we used to do. Like my task management, like I use Trello, I use notion, these things. You know, Trello's so easy to replicate in like a replit or a lovable in terms of just like the basic Kanban board. Right. And I could easily replicate that. I have and I tried to and I'm like this thing is like, why like Atlassian, which is getting, has gotten destroyed, has all the workflows, all the connections on the external side. Yes, you can make this all happen over time, but you know, for, I don't know, what do we pay 5 bucks a month or something for like just traditional Trello. It's, you know, meaningless from the grand scheme of things. And let's just focus on, you know, what we do best. So I think, you know, that's like the whole space more broadly and kind of like my conceptual thoughts around that. But I do think video, specifically video phone systems, all of that I think is much more insulated from, you know, call it AI recreation. And if anything AI helps, right. Like the voice AI opportunity is probably pretty, pretty large. Right. So if you have customer support teams and companies, enterprises have come to you for customer support, you know, if you listen to the 11 labs type, you know, agentic tools that they're building and voice recreation, like a lot of that is going to be infused. Like 11 labs would love Zoom to be their customer. Right. And not just have, you know, OpenAI or Anthropic or one of those, just to be a. A single customer. So I think if you think of systems of record, you know, those are like the data providers, like a Salesforce and such. And, you know, a lot of structured data sits inside of those. There's a perimeter around that. Then you have, like, the enablement layer. Then you have, you know, the intelligence layer. And I think the intelligence is really the AI layer, but it needs everything below it to kind of like to work. And I think Zoom for communications sits in a pretty nice spot for enabling a lot of this stuff to take place and really just leveraging it all in general.
- [20:50]
Ryan Henderson
I think it's pretty telling that if a company like Amazon is signing on for big deals with Zoom or any other Fortune 10 companies, which are the most logical customers to build a tool in house because they can just, like, be their own customer base, essentially. It goes to show that this is maybe not the first kind of tool you'd want to replicate if you were AI Vibe coding something, I guess.
- [21:17]
Brett Schaefer
Yeah.
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Sean Emery
I mean, AWS or Amazon tried building Chime, right? Remember Chime?
- [21:22]
Ryan Henderson
I don't.
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Sean Emery
It was their attempt at, you know, trying to, you know, this was a while back, right? It was. This is like pre. Covid. During COVID Chime was, you know, they couldn't get a. They own the compute. They have probably more engineers than you can imagine, you know, more sales reps than you can imagine. And they're like, you know what? We're shutting this thing down. You look at Meta, Meta was trying to build kind of their own work workforce, you know, suite. They ended up closing that down and sending all of their business to. To. To Zoom. So Zoom has a product called Work Vivo, which is kind of like your intranet for all communications within the business. And that business is growing really strong. They acquired Work Vivo, you know, maybe like three, four years ago. And then it's been enhanced because when Meta shut down, their kind of like, workplace management, you know, business, they just sent it all to Zoom. So that's kind of been a tailwind here over the last, you know, call it 18 months. But again, it speaks to the biggest AI labs, slash, biggest users of Compute. I mean, to say that Meta can't create a viable video product where they have, you know, Instagram and Facebook, and video is like, front and center for them to think of, like Google, right, which owns YouTube, the ultimate video tool that we all, you know, love and use. And, you know, Google Meets fine, but it's like, it's still not the best. Like there is a difference for sure. And yeah, maybe that's converging a little bit, but I still find it shocking that Zoom's still ahead in terms of like reliability and some of these other things. When, when like someone like Google, you know, is still playing catch up, it.
- [23:11]
Brett Schaefer
Feels like, yeah, I mean, you can look at, for example, I'm someone that works at a fairly large organization, the motley fool, probably a thousand people there, they have, what we use every day is Microsoft Office 365. But we still have the Zoom. I, I'm sure they're paying an enterprise plan a subscription there. They still have Atlassian, they still use Jira, all that stuff. And I'm sure on other parts of the team, they're using Salesforce. There are no discussions about getting rid of that. There are no discussions about, hey, we had our team of and I'm sure they have a few dozen, you know, IT people, if not more working for them internally especially they have a lot of, you know, web infrastructure they have to work through and maintain. But I don't think their priority is saying, look, is our business going to be that much better because we can build a Zoom internal replacement for maybe more cost up front that is probably significantly worse than them. I'm not so sure.
- [24:11]
Sean Emery
Yeah, I think that's the point. You have, if you have 20 developers in a room and they're going to be, you know, some say 5x10x whatever productivity, you know, multiple you want to provide on them, like, are you going to be like, hey, build more products for us and so we can sell or are you going to be like, hey, let's cut costs. So like, you know, start building our CRMs from scratch and, you know, start up dating them. And you know, when, when Sean, you know, his communication tools out, you know, they're going to reach out to you and make sure everything is stood up properly. And you know, if you think of like end to end, you know, like compute matters, right? You know, latency matters, all this stuff matters. And so I find it hard to believe. So I think Zoom's only going to get better from this. Right? Their developers are spending every last minute they have to try to make Zoom the best it could possibly be and build new adjacent, you know, tools around it while everyone else is just trying to build, you know, you know, version one and then Zoom comes out with another product and then you have to, you know, hey, developers, you know, they just added AI summaries. So go at AI summaries and you know, they're on, you know, Companion 3.0, but they're, you're still on 1.0 and you're just playing catch up for no reason. And yes, could you see like pricing compress or something like that? I don't know. I mean, Zoom hasn't even charged like I don't even pay for their AI companion stuff yet. 3.0, when you start to get into more complex workflows, yeah, they start to charge for it. So I think it'll start to show up in the numbers that way. And, but I think they were very, very smart early on just, you know, allowing users to use the product. And that says a lot about Eric Wan. He has a war chest of capital, you know, $8 billion and no cash. I mean, no debt. You know, there's obviously the anthropic optionality there, but that's different. That's completely different than, you know, the core business. But you know, he, he was able to build infrastructure to support their product offering and then obviously has a war chest of cash that they could, you know, survive any sort of impact of, you know, not, not charging customers for AI use. And eventually it'll happen when there's enough product out there that they're ingesting and such. And at that time, you know, cost curves for, for AI usage and, and token usage is all coming down anyways, so it's like, you know, where do we meet here? But I think that's like my, my, my, my high level concept of more software than Zoom. But Zoom, I think, you know, being insulated.
- [26:37]
Ryan Henderson
Yeah, I couldn't agree more. And it does seem, well, we haven't really seen an impact on the stock in a period when pretty much there's been the quote unquote SaaS apocalypse. It seems like Zoom's been pretty immune to it. And you mentioned there the Anthropic investment, so maybe let's dive in there. This has been around for, I believe, like what I, the investment was made two or three years ago, if I'm not mistaken. And it seems like people just caught wind of it over the last month. Maybe it's because Anthropic has reportedly had much higher valuations. Can you go into what the investment was? Was there any strategic rationale for the investment beyond just. I know Zoom's got their venture arm. Uh, and what could this mean valuation wise for, for Zoom now?
- [27:34]
Sean Emery
Yeah, so they have their venture arm. You know, this was 2023. They, you know, if I recall, this was the start of AI Companion 1.0. So they were really starting to lean in on. On AI broadly. They brought over the head of, you know, I don't know the exact title, but he was, you know, the head of AI at Microsoft for 31 years or whatever, left Microsoft to go to Zoom, right, and became kind of the head of, you know, AI slash, you know, in kind of the CTO ish role@ Zoom. And that alone is signal, right? And number two is, you know, they were taking what they called a federated approach to AI. They said, look, we're going to infuse AI across our platform. Everyone at the time, it was like, what model are you going to use? And if you recall those times, it was like, what are you on and how do I determine? And they were like, look, we're taking Federated, so we'll live on top of certain models and then we'll make mini models on the side of that. And depending on the type of work you're doing, you know, we will either use, you know, small model, large model, or, you know, somewhere in between. And if it's text, we'll use, you know, you know, anthropics models. And if it's, you know, more visual based, maybe we're using Gemini and Llama, you know, anyways, you have a whole swath of models out there. They all have, you know, these different ones, you know, perform better in different use cases. There's cost involvement there. So, like, if it's a summary and it's going to send me the summary 20 minutes from now, do I really need the highest performant, you know, costly model right now, or can I use something that was more legacy and in nature? So anyways, they were taking a federated approach and at that time, you know, Anthropic was raising, that round was roughly like 15 billion, 10 to 15 billion dollars of a valuation, you know, somewhere between 500 to. I think it was a $500 million round that they were, you know, raising at. And you had a couple of the names out there, Salesforce, you had, you know, Amazon, I believe, was part of that round. And then Zoom had a round as well. And at the time it was just like, whatever, right? It's like, you know, kind of a rounding error for Zoom. You know, they have plenty of cash. You know, you knew they were making something. But the way they articulate their investments, they call them like strategic investments on their, on their financial statements. And so you have to kind of look at the footnotes, see what the number is. And yeah, obviously you can see outflows on the cash flow statement of. Of certain numbers. They were making some acquisitions and. And investments at the time. Small in nature. And then obviously, as time goes on, you know, we're us here, we were paying attention to Anthropic a lot, just in general. And, you know, at one point in the last, like, year and a half, I reach out to the team over there and I'm just like, hey, you know, this is kind of important feeling because now they're at like $100 billion valuation. And, you know, when I go back, it looked like it was a $51 million strategic investment. You know, nothing else was announced during that time. So it kind of has to be that. And, you know, they didn't confirm or deny exactly the, you know, extrapolating the value of that today. Um. Cause there's dilution involved along the way. So I was just trying to ballpark with them. Um, anyway, so communicated back and forth. Uh, and, you know, I knew it internally that there was value accruing here. And, you know, I posted the email that I sent out to them. It was just like, you know, this could be material. So, like, I don't know why it's, you know, not being materially, you know, why aren't we talking about it this in a material way? Um, and obviously, fast forward to today. It's 350 billion is what anthropic is looking to raise out here. And that would equate to, you know, rough math is, you know, $51 million at the time, you know, gave you, you know, roughly 1% of the company. And, you know, fast forward to a $350 billion valuation, you get somewhere between, you know, at just apples to apples, no dilution along the way. Obviously, that's probably not likely is, you know, $3.5 billion roughly, of value that would accrue to them, you know, that's half the size of their cash. That would be, you know, depending on the day, you know, just six months ago, that would have been 25% of their. Their market cap. And, you know, today it's, you know, in the teens. But, you know, take that plus cash, $8 billion of cash, potentially a $3.5 billion investment. And if your view is, you know, soft or AI is eating software, and AI is going to be bigger than software, then this is, you know, again, we're investors, so take it for whatever you want. But it's something where, you know, I hypothesize and it's our biggest holding. It's like, well, if AI Eats software. Anthropic's clearly catching ground in all aspects. They own the enterprise. ChatGPT and OpenAI clearly own the consumer, at least as of now. But it seems like they're making inroads in the consumer too. But we're all talking about Claude and cloud code and some of the cowork stuff that I think none of us were talking about. You know, not that long ago you could hypothesize that this is a multi trillion dollar company. You know what's more valuable? The chips or actual the applications that sit on top of Nvidia and stuff? Anyways, we just did rough math. It's all, it's all hypothetical. But you know, if you go to $5 trillion or $2 trillion or you know, the value of some of these software businesses or taking the whole software market, aggregating it up and saying it's only going to, this is going to go to the AI models. You know, you're talking about things that are multiples of what today's value is at Zoom. So that's kind of like the extrapolated, you know, version. But it's also, if you think about it in those terms, it's almost like a protective layer to your portfolio to some degree, knock on wood, that, you know, if that does happen, that doomsday scenario happens and everyone that is professing software is dead because of these labs and all that value is going to accrue right back to them, well then who's best position? The ones that are sitting with, you know, stakes in these businesses. So there's my ramble.
- [33:54]
Brett Schaefer
It makes a lot of sense and for any you might have mentioned it, but the rumor is that this year Anthropic is planning to go public at a 500 billion to a trillion dollars valuation. TBD, if they actually get that number and of course that's a premium to their business today, but clearly they're growing at just an insane rate. I want to ask this question because when I think of Zoom, a company that I used to own, didn't do very well, comes to mind Dropbox, it's a company that in similar ways is trying to get out competed by some of the big tech giants. And when you look at them, they, you know, Dropbox would put out new products, they'd make some acquisitions, they, they built a, you know, a very, very good product suite. Their stock price has gone nowhere really since they went public I think a decade ago. Now, Devil's advocate, why does this not turn out like Dropbox with a Stagnant share price kind of in perpetuity. What makes that, what makes Zoom different than a company like Dropbox or stock like Dropbox?
- [35:00]
Ryan Henderson
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- [35:49]
Brett Schaefer
All right, listeners, I want to take this time to remind you about the Emerging Moat Stock Research Service, a newsletter that will produce a stock research report every four weeks and regular updates on existing stocks in the emerging moats universe. We have an upcoming schedule including a research report on Wix.com we have interactive Brokers, American Express, Nintendo, Airbnb, Nelnet and much more. Please, if you want, reach out and get a complimentary free trial. You can do that by contacting me through the link in the show notes and giving me a DM on substack. I hope you'll try out the service.
- [36:23]
Sean Emery
Yeah. So Dropbox has appear the peer is box. Box is actually moved. Right. Obviously in the software stuff here recently it's kind of taken a dump like many of the software companies. But if you go back over the last couple years, I remember box sitting at 15 bucks a share. Now somewhere now it's higher than that. But not that long ago for the SaaS apocalypse here was 30, 40 bucks. Why could there be such a discrepancy between those two? And I think the main thing is one serving the enterprise and one is not for the most part, right? And there's, there's, there's valuation differences there. And if you think of Zoom, their enterprise business is their business. It's always been their business. Covid kind of changed that dynamic a little bit, right? Because so many people were just spinning up Zoom for even social happy hours. So I do think when you're in the enterprise and you sell to the enterprise, you are insulated more. It gives you Optionality to, you know, continue to expand your, your product breadth. I do think communications versus, you know, you know, the file storage is, is definitely more commoditized. You know, file storage is very much around, you know, guardrails of files. Right. I mean, at the end of the day, interfaces, making sure it's up, you know, it's working, but a lot less to do there. And then essentially the only thing you can sell is, you know, backup reliability. And therefore you have to sell in the enterprise for, to like, really sell extra layers. Like if you look at Box, right, We use Box for our own file storage. Again, going back to, you know, we don't use, you know, Microsoft's version, we don't use Google Files. And it all comes down to, you know, we're a financial service company, so we have to be very protected and governed. And they have arguably the best, you know, governance and security and reliability than, than most. And so that's why we choose Box. And yeah, we could switch to another and you know, but I don't think Dropbox has that same appeal. So I think the big giants, Microsoft, Google, are eroding the consumer market away from Dropbox, while Box continues to kind of thrive as an independent provider of files and focusing on enterprise and security. And then obviously, Aaron Levy's great. You know, he's, you know, one of the funniest, you know, more humorous guys on, on, on X. And I think he's at the forefront, he's smartly at the forefront of the AI initiatives and communicating messaging around it. So I think he's done a really good job to be the spokesperson for software and the spokesperson for AI. So I think you kind of have to do that as well to, you know, to potentially afford a some sort of premium. But I think it's a good point. You never know what's gonna happen in the future. But I do think Zoom has an interesting roadmap and they're instrumental to business. You know, I think like, no one really cares whether their files are sitting inside of Dropbox versus the other. I think actually people, you know, don't mind Zoom in that light, per se.
- [39:29]
Ryan Henderson
Okay, I've got two questions for you. First, one here is purely hypothetical because you can't actually, we can't actually go back in time. But do you think Zoom would be a bigger business today, customer wise, revenue wise, if Covid never happened?
- [39:48]
Sean Emery
It's a good one. It's one of those things where Covid sparked the requirement for Microsoft to get serious about this. Now, I still don't think they've taken the inroads. Right. We look at the Okta business survey every year and Okta obviously has a good intel of like cross account or application usage. And since we've been tracking it, Zoom has gained traction in Office365 accounts every single year, which is kind of crazy. There may be some skewed bias to the fact that Okta deals with independent, you know, firms as well instead of using like Microsoft Auth or some of these other, you know. So I think maybe their audience is a little bit more best in breed, you know, focusing on more best in breed than, than anything else. But I still think it means something now there, yeah, there was a time like, I think that's like the easiest takeaway from it is it required, you know, Microsoft to stop putting out Skype, which was an awful product. Google barely had anything. But, you know, it's a gift and a curse. Right? A lot of cash flow came in. I would say the worst part that happened to it with it was culture. You know, Eric Wan always talks about it. They grew too fast during that time. They had to, they're forced to. And so you kind of got in this malaise which happened. And then also, you know, the stock based compensation conversation, which is, you know, a lot of people got paid in stock during those times and they went from 300 to 600 and then they were paying people at 600 and then the thing dropped all the way down. So you have a lot of people that were underwater. And then, you know, in that 20, 22 year, they had to true up there to keep talent, you know, because their stock plummeted and they had to keep talent. So you had to true them up. Basically say, okay, well we gave you stock at 600, but you know, we kind of have to, we're now at, you know, at the time, let's say 200 and they're like, well, we're going to take you down to 200. But it's obviously, you know, more shares as a percent for the same dollar amount. And that was part of the issue. So I think culture, it impacted them. I think last year they finally like washed out some of that culture. But it did drive a lot of cash to the business. And so it's a gift and a curse. But competitively, I think, you know, who knows? I mean, again, it's all hypothetical but you know, at some point I think Microsoft would have taken it seriously. I just don't know when that would have been.
- [42:26]
Ryan Henderson
Yeah, it's, it's Interesting data around the Microsoft accounts. Zoom gaining share within the, those that have Microsoft accounts as well. The, I guess second question, this is less theoretical. Do you think Zoom has pricing power?
- [42:43]
Sean Emery
Yeah, I mean they raised price last year, saw record churn. They raised price the year before, saw record churn, record low churn, that is. So they're typically priced on the low side. When you compare apples to apples relative to the platform, you know, maybe not, you know, maybe that is a little bit superficial because you know, not everyone knows exactly what the platform is and they're thinking of it as meetings versus team chat, which we use now all the time. Clips, which is the loom product and Slack replacement, which. Yeah, which Team Chat and Whiteboard. So you're not using Miro or any of those products. You know yesterday they announced in, in Whiteboard a image generation tool. So like you know, if we were collaborating here on a whiteboard inside of a Zoom video meeting for our Monday meetings, like you know, you can now spin up image generation in there and so you know, work that they've been able to show pricing power. They don't usually use price as a lever until they think there's enough value. And I think AI is a good reflection of that. Where it took them 20, 23 to today to really think about, you know, monetizing the AI stuff. So I think they put product out, they have enough margin to end cash to withstand whatever happens and then raise price when and where they can. One thing they did that was low hanging fruit was looking at their user base that are using the 40 minute free but using it regularly as real usage. So you're just stopping at 35 minutes and then restarting in five minutes and monetizing those. So it's like quasi price increase on those that we're using for free that have to pay a minimal amount. Remember they tried ads too. Um, there, there were, you know that was like peak over. They were, they were thinking of throwing ads in, in the stuff. Um, I do think they missed that opportunity. I think they, I think Zoom could have, I don't think they had the DNA.
- [44:39]
Ryan Henderson
But what would an advertising element have looked like? Would it have been less so for the enterprise and just more for those individual users?
- [44:49]
Sean Emery
Yeah, you could have done the free, you know, the free no pay. Right. And just an ad, you know, banner. I don't know. They were, they were testing it so you know, it kind of, they shelved it like fairly fast. But you know, you could imagine every meeting you start there's you know a 10 second roll. And you know, at the end there's, you know, you can make it, you can make it slick and seamless, right? As much as you wanted. But, but again, I think if the competitors aren't doing it becomes a challenge. Right? Because like a couple bad experiences in that or strange experiences. I don't know how they like again they shut it down. So there's not much context to it. But I can imagine, you know, you know, if there was like a little thing hovering around this, you know, this screen right now without that wasn't like inside the actual picture. Like I don't think any of us would totally mind that. And I'd be watching, looking at it for 60 minutes. It's not the worst Dev marketing.
- [45:49]
Brett Schaefer
Talk about buyback capital returns. You mentioned the balance sheet. $8 billion and growing in cash plus the investments. What has been their buyback strategy and how is that turning into either share count reduction and how they look at it and how pleased you are versus that, taking that versus their stock based compensation.
- [46:12]
Sean Emery
Yeah, so the last several years has really been around the stock based compensation buybacks basically just offsetting. So they've had multiple rounds of, you know, a billion and then a, you know, a $2 billion buyback. So definitely, you know, ones that are, you know, accustomed to initiating buybacks. Again, I think the last couple years has really just been around offset versus share reduction as much. But I do think we're starting to get to that place where, you know, if you look at stock based comp and again they're, you know, if you're not following the story, then you don't know about, you're not necessarily understanding that there was a true up involved which forced, you know, it's kind of like a forced moment for them just given the stock price run up. And then you could say allocate, you know, capital allocation, you know, mismanagement at that point in time. But I think most people face that when your stock price goes up, you hire a bunch of people because you are the company that is required to grow, you know, in some extent. And so, you know, you go back, you know, a couple years, you know, I have in front of me, but stock based comp as a percent of revenue, you know, ticked up till almost like 40%. But a lot of that was artificial to some degree. Again, it was one time true ups that would start to show up in the, in the, in the cash flow statement over time and then, and then subside. And so we're nearing the other side of that where stock Based comp is now, you know, closer to 15% and declining. You know, the goal is to get it sub, you know, 10, which is fairly normal in the grand scheme of you know, when you look at, you know, some of the biggest companies in the world and so getting to a place of, you know, that it's more reasonable and ultimately what that means is their buybacks will be much more supportive for share count reduction versus call it a couple years ago, which was really more just offsetting so a lot of cash. If you know Eric Juan, he's been very, he's been a very conservative steward of capital. Like if you had to pick like the three different tranches of capital allocation, it's you know, the aggressive abusers that you know, buy a bunch of stuff and you know, pat on revenue and you know, things don't necessarily show up. Then you have kind of the, you know, the buybacks and you know, they'll raise capital here and there and not necessarily, you know, mid ground, let's say just like semi normal. And then you have someone like him who has historically been very conservative. When they went public, I think they were sitting on like 5,600 million dollars of cash and no debt and he still raised like a billion dollars or something. And his saying is, you know, you raise capital when you need it. I mean when, when, when you, you raise capital not when you need it, but when people are willing to give it to you. Because when you need it, it's going to be expensive and there's a chance you don't get it. And you know, that makes a lot of sense to me. And so look, he's been a good steward of capital from a conservative standpoint. You know, they've been pushed on, you know, are you going to do something much more transformative? They tried to buy what, five, nine, four years ago, three years ago. Then there was rumors that they were trying to do it again. What did they do instead? They built their contact center from the ground up and sure enough, triple digit grower. So they executed wonderfully there. They bought work vivo maybe I think for like 200 million bucks. And it's turning out to be a really strong business for them. They've acquired a couple different, you know, smaller tuck ins, let's say over time that I think are interesting. So they're doing small tuck in acquisitions to bolt onto the platform, to enhance the platform really around AI and some other stuff. And then capital allocation, share buybacks has been important. I could see this eventually some sort of dividend, you know, something you know, there's just so much cash there. I think, I mean, if there was ever a time and if you had a belief that software isn't going to not exist, you have decent opportunities out there to go out and it may be too soon. Right. Because like this has kind of been somewhat sudden. So if you're a management team at a software company, you're kind of like, this will come back, you know, everything's fine. But at some point, if this continues in software, multiple stay depressed. I think Zoom could be in a pretty prime position to extend their platform, you know, and I think that would be powerful to then own a couple ecosystems that are adjacent to each other. So I think work management, communication, work together well. So. And then it would give more context for AI usage. Right. So, so I think a lot of that is how I'm thinking of like capital allocation right now.
- [51:12]
Brett Schaefer
What about valuation? We, you know, we see the stock, it's up a little bit, but we're, as you mentioned, you know, the enterprise value to operating earnings could be, you know, in that mid to high teens, depending on, on the day. How do you think about valuation? What do you think their margins could get to? Kind of maybe some insight into how you guys do any sort of whether it's DCF or looking at the business in that way.
- [51:40]
Sean Emery
Yeah, when you're a fairly low grower, it's a little bit easier to apply a multiple. You're basically saying like, how long is this company going to last and you know, what kind of cash can it generate? And then, you know, tie that thing back to today. Right. Versus 50% grower. How long is that going to last? Where are margins going to level out at? So Zoom's been tested, battle tested in many ways. Pre Covid, post Covid, biggest companies in the world, you know, going after them now they're focused on other things, let's say it seems like. And so look, I think Zoom is a best in class. It's hard to say now. Right. Because with what's going on, software company, but a best in class communication platform, that is one of the layers, I think that's important to, you know, organizations and therefore should deserves, you know, an elevated multiple. And that elevated multiple, I think again, you know, should be somewhere, you know, above, you know, 15, you know, 25 times, you know, the range is pretty wide. But I think ultimately that's where it should kind of exist at most times, unless there's something that you're seeing that's completely decaying. And the premise of that Is again, churn is record lows, you know, cash is, you know, pristine balance sheet, all those nuances. Margins, despite all the competitive threats, have been rather stable. And so you have, you know, cash flow margins that are, you know, north of, you know, 40%. You have gap margins that are, you know, approaching mid-20s, you know, pretty quickly. And so you have a best in class, you know, financial model, you know, post revenue. Now can you get revenue to really pick up where you start to get to, you know, mid to high single digits and then eventually, you know, hopefully like very low double digits. I can't imagine it grows that much faster than that. And so think of it more of as a, you know, your traditional high quality asset, that pristine balance sheet, conservative capital allocation that can, you know, drive some multiple expansion, you know, in the magnitude of, you know, you know, 20, 30%, let's say. And then the rest is compounding revenues and margins over time, you know, at a call it, let's say mar or margins somewhere where they are today. And then revenue growing in the high, the high single digits, you know, over the next, you know, five to three to five years. I think that's ultimately how you think about it. And you get to numbers that are, you know, closer to double where they are today on a, on like a five year basis. And it's really just revenue growth with same margins and then some multiple expansion involved there. And, and then you throw in obviously the anthropic stuff that's more cherry on top, but could be very, very meaningful, even though it's meaningful today. So that wasn't part of the original thesis, let's say in terms of anthropic. But I do think when you do have a pristine balance sheet, you have flexibility to make investments that work out for you and this one's working out for them. They own, you know, they have a stake in core weave, they have a stake in perplexity. I'm not sure where plexi is going to go here, but so those are less meaningful. But you know, maybe in the magnitude of, you know, 3 to 400 million for like core weave and depending on the day, and then perplexity, we'll see. I mean, there's questions of whether perplexity will even be around here in the next, you know, year or two. But at this point, even though it looked like they were going to be a significant leader, so that's kind of how we're thinking about valuation. Steady, easy compounder that I think can continue to grow and I think the growth will Come from more phone, more contact center, more AI and then meetings continue to be meetings.
- [55:32]
Ryan Henderson
Yeah, it's. After going through this whole conversation, it's pretty amazing how much Zoom has flown under the radar over the last few years, given the anthropic stake, given that the business at the enterprise level seems to be doing just fine, and there's a lot of product evolution as well that they've had. I guess the last question, because I think we've touched on pretty much everything, would be, what do you think most people misunderstand about Zoom today?
- [56:05]
Sean Emery
That it's just purely a meetings company? I think that's like, it. Like, you think commodity, right? Comedians, company commodity. They're gonna get eaten away. There's very little evidence of that. And so, like, my rebuttal all the time, and we have like a little deck that I had to make on the rebuttal of stuff. And it comes down to the same points, which is, you know, for a while it was that it was, you know, what about Microsoft and Google? Aren't they just gonna, like, you know, I'm like, well, people been saying that for, like, ever since they existed. And in Covid, if there was ever a moment to like, again for their competitors to really, you know, amplify their. Their attempt here, they did. I'm not saying that, but, you know, it's not showing up in margins, which would be the most obvious place this would show up and everything else. Right. If you're raising prices and doing those things, you could maybe offset some of the revenue issues that maybe form up. But margins would. Would compress pretty dramatically if, like, there was massive competitive threat. And then again, you know, surveillance stuff like the Okta reports and, you know, some web traffic data that we try to, you know, cross contaminate. You check it on the weekends versus the weekdays. You know, who's leading on app downloads and app, you know, engagement. So look, I think the two main things that people misunderstand is it's not just a meetings company anymore. Meetings was the way in, and then people that are using it are using it across multiple services, not just, you know, clicking a meeting and going, like, after this, I'm literally just going to be sitting inside of my. My Zoom as kind of like my slack on the side. And, you know, we just communicate internally like that. I have external conversations with other firms that we. We work with that are inside there as well. So it's become kind of like a mini communications hub for external and internal. So I don't think people realize all these Things. And then. And then again, a lot of people got burned, you know, you know, people got burned. And, you know, I know the feeling of getting burned and investing in something and you're like, nah, I'm going to look at that thing again. And that's just human nature. And I think you take those two things combined, I think, you know, you get a sense of. And then, you know, look at the market and how what people have been gravitating towards recently in the last several years. You know, there was a study by NB ER the other, you know, the other day that I saw that, you know, the average person spends six minutes researching a company and, you know, and executing on that. And they were like, the power users spend 30 minutes. I'm like, man. And that's like kind of the world we're living in today. So, like, is zoom that exciting for that person? Maybe not. I mean, that's why you're seeing a little bit more love from it when people start talking about anthropic and all these other things, because it's making the story a little bit sexier. But it's actually not the direct story, it's the indirect story that's probably making it more attractive for some, for like a high flyer. But like, I wouldn't mind it to be a high flyer here, but obviously. But I also think those are kind of like the two main areas. And again, we'll be patient. We've been patient here. It's starting to work, you know, nicely. So knock on wood, it continues to work.
- [59:25]
Brett Schaefer
Okay, Sean, thank you for taking the time today. For the listeners out there that want to learn more about your work, tell them where they can find more information about you and your firm. Yeah.
- [59:39]
Sean Emery
I post everywhere, right. I follow all your guys work and everything you're doing, and you guys do a great job. And X underscore Sean David, that's S E A N David, that's on x and then LinkedIn. I post a lot now and then our website, right? You know, Avery XYZ. So www.avery.xyz. um, we have some. Yeah, that's where we're at.
- [60:07]
Ryan Henderson
Perfect. All right, I think that is going to do it. Thank you, Sean, for joining us today. Thank you everyone for tuning in to this episode.
- [60:16]
Sean Emery
Like we said earlier in the show.
- [60:17]
Ryan Henderson
If you're interested in learning more about Sean or Avery, we'll have links in the show notes, go ahead and check them out. But that is going to do it. We want to remind listeners that nothing said on this podcast is formal advice or recommendation. We may buy, sell or hold securities discussed in this podcast. So please do your own work. Thank you everyone for tuning in, and we'll see you next time.