By Catherine Yoshimoto, director, product management
As the global pandemic has made video conferencing the norm for both business and personal communication, demand for software like Zoom has surged. But there’s another, lesser-known story to tell about Zoom—its rise from Russell US Indexes ineligibility in 2019 to its recent inclusion in the Russell 1000 Index.
This ascent is an apt illustration of how our index inclusion methodology works—and how companies can rapidly adapt to meet our robust and transparent eligibility requirements.
Consistent index rules and methodology are vital for investors. In the case of a novel company such as Zoom, clarity is vital: at the start of the year, trading in a similarly-named company was halted by the SEC, amid fears investors were buying the wrong stock. So how did Zoom (ZM) arrive in the Russell 1000 so quickly?
After its IPO in April 2019, Zoom was evaluated for inclusion in Russell US Indexes during our June 2019 annual Russell reconstitution. The company met some Russell 1000 eligibility requirements—including a market cap in excess of $20 billion— but fell short of the minimum voting rights hurdle. This was because Zoom was structured such that Class B unlisted shares were allotted 10 votes per share while Class A shares were only allotted one vote per share. And since Class B unlisted shares comprised over 90% of total Zoom shares, this resulted in less than 1% voting power in public hands.
This figure was well below our voting rights Russell US Indexes eligibility threshold, which requires developed market companies to have greater than 5% of the company’s voting rights in the hands of unrestricted (free-float) shareholders. The minimum voting rights hurdle was implemented in our Russell US Indexes in September 2017, as the result of a rigorous collaborative process where we consulted index users, other stakeholders, and our external advisory committees. With this hurdle in place, Zoom wasn’t eligible for Russell index inclusion in June 2019.
When Zoom eligibility was revisited in June 2020, it was a changed world in many respects—and very much a changed Zoom. The company’s market cap had more than doubled to $46.8 billion, placing it well into Russell 1000 Index eligibility. And while its votes per share rules didn’t change, what did change was an increase in Class A shares free float. Coinciding with this was the conversion of over half of Zoom’s Class B unlisted shares to Class A shares, effectively boosting its public voting power to 12.7% and exceeding the 5% eligibility requirement.
Zoom’s June 2020 addition to the Russell 1000 meant that it leapfrogged the Russell 2000, bypassing the initial step of many companies that later grow to become eligible for the Russell 1000. In this respect, the video communications company is a true “high school to the pros” story. And since its inclusion in the Russell 1000, Zoom’s growth trajectory has continued. As shown below, as of September 30, 2020, the company’s market cap has reached $132.5 billion and is now larger than the broader Russell 1000 dollar-weighted median market cap.
This growth illustrates an eventful year for Zoom, as the global pandemic almost instantly made the video conferencing software company a household name. But what Zoom also accomplished in the past year is a transformation from a company that wasn’t eligible for any Russell US Index in 2019 to a company that was eligible for Russell 1000 inclusion in June 2020. The transparency of our rules and methodology gives companies a clear playbook on how to strive for eligibility—and in this example, Zoom was able to restructure their securities to meet our voting rights threshold.
Photo Credit: Nick Doty via Flickr Creative Commons
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