Coronavirus picks part 5: Zoom
Disclaimer: I hold a position in the symbol discussed. I am not offering any financial advice, simply explaining my decision to buy this symbol.
The worst thing I've heard about Zoom is that their security still leaves much to be desired, but common, I mean Apple exists, am I right? (No seriously, Apple's security model has always been security through obscurity, and over time it is increasingly catching up with them. iPhones are not secure; Safari is not secure; etc.)
So anyways, if people are saying the product is great, but it's not entirely secure. Well, who cares? One of the most important things I've learned about investing in the last eight years is to set aside any negative analysis that I have related to any field in which I have any expertise that would indicate to me that a product is bad. People don't switch products over bugs and security vulnerabilities if they like the UI. Microsoft is a great company today, but it should not have survived the Steve Ballmer years. There is not a single company in the world that was using Microsoft in 2014 because it was the right business decision. Microsoft was simply the wrong choice for business compared to Linux in 100% of cases for desktops and the wrong choice compared to Amazon in 100% of cases for cloud and the wrong choice instead of Oracle in 100% of choices for Enterprise software where Oracle had a competing product, etc.
Microsoft did not do anything as well as its competitors in 2014.
Satya Nadella has done an amazing job of turning them around. I should own their stock, and someday I probably will. Right now, I just see better opportunities. Of the extreme-mega-cap companies, the only one I like well enough to own is Tencent, but I routinely consider taking a stake in Microsoft or Amazon. (I didn't end up investing in Amazon or Tesla at the time I wrote the original posts on this blog because I didn't have money. I did eventually take a position on Tesla a few years later. [I have positions in Tesla and Tencent and do not have one in Microsoft, Amazon, or Apple.])
Zoom, by all accounts, has a great UI, and has done a great job of branding to convince everybody that they're product is fantastic in every other imaginable way. Few people have any firsthand experiences to contradict that branding, and almost all of these people still have a net positive view of Zoom because they also have experiences that align with Zoom's branding.
Moreover, Zoom was the best in class in a sticky business with strong network effects at the optimal moment to be the best in class in that business, so now they command a significant percentage of the market share, much more than they could have hope to control as a startup under any other circumstances. This gives them more data to work with for further optimizing their product, a continued robust network effect, and more reinvestable revenue and opportunities to reinvest such revenue than they otherwise could have hoped for.
Companies like Google will pose some amount of a threat to them by trying to offer a similarly high quality product for free, but for the most part, people who are willing to pay for a product would rather pay for it and have the ability to demand that it is supported than to not pay for it. (And Zoom has a free version of their product, so undercutting them by having a product that is free in some circumstances isn't possible.)
Zoom was on my watch list before it spiked up 100% during the lockdown, but I thought it was overvalued. When I came back and looked at it and saw its growth numbers from the lockdown, I decided it was a symbol to buy instead of one to watch. I don't think the 100% spike in Zoom's valuation comes anywhere close to reflecting the true benefit to their business because of coronavirus and the response that has been taken to it.
My favorite form of investments are ones where I know I understand the bear thesis, and I know that the sentences the bear thesis contains are true, and I'm convinced they don't matter.
The bear thesis for Zoom is that it has a "narrow moat" i.e. that it's technology would be easy for someone else to replicate; and that there is plenty of room for security and privacy concerns.
Consumers don't act on security or privacy concerns, though they will occasionally on the perceptions of these concerns that companies create through branding. Blackberry invested heavily into security and privacy; Apple just invested into marketing that it's products were secure at a time when relatively few people had bothered to start targeting Apple when they were attempting to hack devices. [I own a stake in Blackberry, as well, that I took shortly after the company returned to profitability.] Consumers, including the professional consumers who end up making purchasing decisions, have no understanding whatsoever of security and privacy. They understand marketshare and UI, and trust that whoever has done the best on these things has done the best on anything else.
I once worked on a bug fix that eliminated several minutes of waiting for the users of a product I maintained when they submitted their data for processing. When the beta was released, the UI was still bad, and the response to this feature was overwhelmingly negative. It was the worst-received feature I worked on at that company even though it saved our customers time and introduced no new bugs, and I had introduced bugs as part of other features I'd implemented.
This change took something from taking minutes to being instantaneous, and every issue that our users encountered, including ones for long-standing, documented bugs that they had previously encountered, was attributed to this change. (For those of you who understand it, the code had been previously submitting thousands of rows individually to the website to then submit them to an offsite database, and it submitted these rows serially waiting for the full round trip. I fixed it so that it aggregated them into a single submission to the website, which then uploaded them with a single insert.)
Fortunately, my manager understood what was going on and understood consumer psychology well enough to suggest a solution. Prioritize cleaning up the UI, and add a short lag with an animation to at least make the submission take a couple seconds, sot that the users wouldn't think it was broken. Once this was done, it was the most positively received feature I worked on for that company.
Consumers are idiots.
All of my worst investment ideas I've ever had were because I failed to realize this. Consumers are idiots. I will never make another investment decision based on the assumption that consumers will prefer objectively better products over ones with features designed to appeal to the psychology of someone who has no idea what's going on under the hood. (This incidentally is one reason why programmers can't stand any operating system except distributions of Linux, while no one besides programmers use Linux. If you understand what your computer is doing, Linux is obviously better in every imaginable way. If you don't have a clue what your computer is doing, Apple and Microsoft are much better at introducing obnoxious features to convince you that they have everything under control. Does your Microsoft computer feel like it has features that were designed to be obnoxious? Guess why that is. It's because that's Microsoft's competitive advantage against Linux. Consumers are idiots, and Microsoft understands this.)
Zoom has a huge mote. They have a best in class UI. When people try to compete with Zoom competent people will try to improve upon without understanding all of the forms of consumer idiocy that go into making a good UI, and without the customer base to help them figure that out as quickly as Zoom can. Zoom also has a network effect to help their business which is the best kind of moat.
Branding, market share, and network effects are the moats. Everything else is just a means to an end. (Other advantages make for good investments. Internal efficiency, i.e. being able to produce things at lower costs than your competitors, is also a pretty good advantage, but that is typically primarily a byproduct of market share, technological advantages erode over time, but market share self-perpetuates.)
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