When the lockup period ends for Zoom Video Communications (Nasdaq:ZM) on October 15, 2019, its pre-IPO shareholders and company insiders will have the opportunity to sell large blocks of currently-restricted shares. More than 35 million shares of Class B stock are currently subject to the IPO lockup.

(Source: S-1/A)

We believe that company insiders and pre-IPO shareholders will be keen to cash in on at least some of their gains - ZM has a return from IPO of more than 113%.

Significant sales of currently-restricted stock could flood the secondary market for ZM when the IPO lockup expires and send shares sharply lower in the short term. This provides a short opportunity for aggressive investors ahead of the lockup expiration.

Investors also appear to be cycling out of unprofitable tech companies, so we believe that this could weigh on ZM in the shorter term.

Business Overview: Provider of Video Communications Platform

Zoom Video Communications operates a video communications platform that works across disparate locations and devices with high quality. The platform connects people through video, chat, voice, and content sharing. Its face-to-face video connections enable thousands of people to meet in a single conference. The company’s platform is cloud-based, and Zoom Video Communications touts its high-quality video as easy to scale, manage, and deploy.

(Source: S-1/A)

The company puts emphasis on reliable communications that build greater trust and empathy between customers. In addition, the company believes its success is due in great part to a communication system that “just works” rather than having glitches or difficult work-arounds due to varying devices and operating systems.

The primary product is Zoom Meetings, which delivers a full line of products and features for a seamless communications experience. The company offers Zoom Rooms, which delivers a conference room experience. Zoom Rooms also enables customers to quickly launch Zoom Meetings at their physical locations. It also offers Zoom Phone, which is a cloud-based PBX system that works alongside Zoom Meetings. Zoom Video Communications uses a robust partner and integrations ecosystem that provides a frictionless experience with third-party applications.

In 2017, Forbes Media LLC produced a study that showed 62% of organizations utilize three or more conferencing solutions. The respondents noted the difficulty in addressing multiple communications needs and the expense of managing those disparate solutions. Zoom Video Communications addresses those needs and reduces the expenses to manage them.

The company’s clients include Uber (NYSE:UBER), Zendesk (NYSE:ZEN), Caesars Entertainment (Nasdaq:CZR), Autodesk (Nasdaq:ADSK), GoDaddy (NYSE:GDDY), Atlassian (Nasdaq:TEAM), Slack (NYSE:WORK), Arista, Nasdaq (Nasdaq:NDAQ), Dropbox (Nasdaq:DBX), Logitech (Nasdaq:LOGI), and Pandora (OTCPK:PNDZY), among others.

Zoom Video Communications has approximately 1,700 employees and keeps its headquarters in San Jose, California.

Company information sourced from the firm's website and S-1/A.

Financial Highlights

Zoom Video Communications reported second-quarter financial highlights for the period ending July 31, 2019:

• Revenue was $145.8 million for an increase of 96% versus the second quarter last year.
• GAAP income from operations was $2.3 million versus $3.4 million for the same period last year. GAAP operating margin was 1.6% for the second quarter and non-GAAP operating margin was 14.2% for the same period.
• GAAP net income attributable to common stockholders was $5.5 million. This equaled $0.02 per share versus $0.00 per share for the same period last year.
• Total cash, cash equivalents, and marketable securities equaled $755.3 million.
• The company had approximately 66,300 clients for an increase of 78% versus the same period last year.

Financial highlights sourced from the firm's website.

Management

Founder Eric Yuan serves as President, CEO, and Chairman of the Board of Directors. He previously served at Cisco Systems (Nasdaq:CSCO) and WebEx Communications. He earned a degree in applied math at Shandong University of Science and Technology. In addition, he earned a Master’s degree from China University of Mining & Technology.

CFO Kelly Steckelberg has served in her position since November 2017. She previously held senior financial positions at Zoosk, Cisco Systems, and WebEx Communications. She earned a degree in Accounting and an MPA from the University of Texas at Austin.

Management information sourced from the firm's website.

Competition: Poly, Blue Jeans, and Global Meet

Zoom Video Conferencing is a top provider in the VCaaS marketplace. However, the company faces competition from Poly, Blue Jeans, GlobalMeet, West, StarLeaf, Cisco, Microsoft (MSFT), GoToMeeting, and Google Hangouts (GOOG) (GOOGL).

Early Market Performance

The underwriters priced the IPO at $36 per share. Its expected price range was originally $28 to $32. The underwriters revised the expected price range just prior to the IPO to $33 to $35. The stock closed on the first day of trading at $62 for a first-day return of 72.2%. ZM has a return from IPO of 113.4%.

Conclusion

When the IPO lockup for ZM expires on October 15^th, pre-IPO shareholders and company insiders will be able to unload large quantities of currently-restricted shares. With more than 35 million Class B shares currently subject to the lockup, significant sales could flood the secondary market and send ZM sharply lower in the short term.

Aggressive, risk-tolerant investors should consider shorting shares of Zoom ahead of the IPO lockup expiration. Interested investors should cover short positions during the October 16^th and 17^th trading sessions.