Investors recently bid up Zoom Technologies (ticker: ZOOM) thinking it was Zoom Video Communications (ticker: ZM). ZOOM is a tiny Chinese company that makes mobile devices and handsets. ZM is the popular video conferencing company based in the United States. These are two completely different companies. How does such a mixup occur?
The simple (and more forgiving) answer is that some people went to buy the video conferencing Zoom only to select the wrong company in the search bar and completed their purchase anyway.
In my view, the more likely answer is that the analysis these “investors” conducted consisted of seeing the popularity of Zoom Video Communications’ product and then promptly shutoff their brain.
The difference bewtween the two companies ends with the apparent similarities of the two ticker symbols. ZOOM is based in China and has a market capitalization barely in the tens of millions. ZM, by contrast, is based in the United States and has a market cap measured in the tens of billions.
The fact that such a mixup occurs is proof that some market participants do not do their homework (or even glance at the study guide, to continue this metaphor). Purchasers of equity securities are buying a business. Some forget that. It’s simply inexcusable to buy the wrong business because you could not be bothered to know some key facts about the business you were buying, like what its approximate market cap was, or where it was domiciled.
These types of mixups have happened before. Apparently when ZM went public a similar runup happened with ZOOM. A quick Google search reveals instances in the past when “investors” bought FORD (Forward Industries) thinking it was F (Ford Motors). It happened when Google announced the acquisition of Nest Labs and people bid up NEST, which happened to be Nestor, Inc. Such mixups are unconscionable. Yet they happen. And the fact that they continue to happen is sad, yes, but also reassuring proof that the market is not perfectly efficient after all.
A comment on the right Zoom (ZM) is also warranted. The fact that so many are getting excited about the company may also be short-sighted. A cursory glance at the financials reveals ZM has barely etched out a profit and yet trades at multiple tens of billions. The value of a company is its future cash flows from now into the future. But what will that future look like?
Bidding up ZM to $40 billion means investors are thinking it could distribute multiple billions in the future. But can it? Will users of the video conferencing software remain after the Coronavirus outbreak brings us back to the office? How many competitors will spring up? Will Google Hangouts or other existing competitors negate some of ZM’s initial momentum? If you are confident of those answers then by all means buy the company. I simply have no clue.
The above article and video is intended for educational purposes and/or is the opinion of the author. It should in no way be considered investment advice. Do your homework and speak to a professional before even considering investing.