Should Investors Welcome Zoom's $14.7 Billion Deal?

This post was originally published on this site

Zoom Video Communications (NASDAQ:ZM) announced last Sunday a definitive agreement to acquire the contact-center specialist Five9 (NASDAQ:FIVN) in a $14.7 billion all-stock transaction.

Should investors welcome such a large deal? Let’s take a closer look.

Not a surprise

Zoom’s foray into contact centers shouldn’t surprise investors. During the company’s latest earnings call, CEO Eric Yuan had commented on potential new developments in the contact center arena. Indeed, the company can develop synergies and cross-selling opportunities with call-center capabilities it can offer to enterprise customers.

Image source: Getty Images.

So far, Zoom had been partnering with various contact-center vendors, including Five9, to enhance its services, allowing enterprises to better manage communications with their customers.

In contrast with legacy on-premises solutions that require clients to host and manage their own call-center infrastructure, Five9 provides those capabilities via the cloud. That gives users much more flexibility to manage and scale this part of their business. And because it’s hosted in the cloud, Five9’s offering is a natural complement to Zoom’s platform.

During a conference call in March, Yuan even highlighted the seamless combination between Five9 and Zoom’s cloud-based products, so this deal makes sense. Zoom can now provide customers with an integrated solution.

In addition, the acquisition will expand Zoom’s addressable market from $62 billion to at least $86 billion, according to management. While you should take these exact estimates with a grain of salt, it’s clear Zoom’s growth opportunities will be expanding further.

About that price tag …

However, with a $14.7 billion price tag that amounts to about 31 times Five9’s trailing-12-month revenue, did Zoom pay too much?

Granted, Five9 recently reported impressive results. For instance, revenue increased 45% year over year to $138 million during the first quarter as enterprises have been migrating their legacy on-premises contact centers to the cloud. And management raised its full-year revenue outlook to $550 million (at the midpoint), which corresponds to 26% growth over 2020.

But the agreed-upon deal is already pricing in these kinds of results over many years. In addition, with increased investments to fuel its growth, Five9 recorded a net loss of $12.3 million during the last quarter, compared to $7.4 million in the prior-year period.

Interestingly, Zoom didn’t leverage its rock-solid balance sheet to finance the transaction (by the end of its fiscal 2022 first quarter, it had accumulated $4.7 billion of cash and equivalents). Instead, the companies agreed to an all-stock deal, which is a smart choice for Zoom as it takes advantage of the strong currency its stock represents.

Indeed, thanks to the company’s phenomenal performance over the last several quarters, boosted by the need for remote communications during coronavirus-induced lockdowns, Zoom stock is up more than 400% since the beginning of last year. It currently trades at a similarly high price-to-sales ratio of 32.

Looking forward

It remains to be seen how this combination will play out with Five9 and Zoom’s existing partners. In a blog post, Yuan said Zoom will still support other contact-center solutions, and I don’t see any difficulty here.

In contrast, the integration of Five9’s products with other communication platforms may be at risk as competitors might want to avoid fueling Zoom’s growth. For instance, Microsoft could prioritize the support of other contact-center providers for its Microsoft Teams platform.

In any case, considering Zoom’s history of strong execution, investors should welcome the deal, which is expected to close during the first half of next year (subject to various approval by shareholders and regulators). The combination should offer a sizable boost to Zoom’s long-term growth potential.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.