This software company is forecasted to grow at an annual rate of 51% over the next five years.
Zendesk, Inc. (ZEN)
From Canaccord Genuity Research
Zendesk, Inc. (ZEN) posted another solid quarter highlighted by 61% RPO growth, 37% revenue
growth (ahead of +36% consensus) and operating margins that improved by 340 bps y-o-y. We continue to believe that product bundles—both Suites and newly introduced Duet (Sell + Support)—are removing friction from multi-product sales cycles and driving more strategic customer conversations as Zendesk pursues its strategy up-market.
Thinking longer-term, we were also encouraged by qualitative commentary around early
engagement with Sunshine and the related ecosystem build out, as we believe traction with a broader customer experience platform will be important to Zendesk sustaining a multi-year run of 25%+ growth. The next catalyst on this front will be additional color on the plan for CRM monetization, which we expect to receive at Zendesk’s Relate event in March of 2020, if not earlier.
In a software sector in which quality assets are quite expensive, we continue to see relative value in ZEN and believe that the firm’s commitment to delivering a balance of high growth and consistent margin expansion will compel incremental buyers over time.
Zendesk has been successfully executing its move up market, reflected in its 61% RPO growth and the percentage of ARR from customers with 100 or more agents, which advanced to 42%, up from 38% a year ago; management has compelling aspirations for Smooch, which it acquired in May of this year. Smooch’s messaging capabilities will be positioned at the center of Zendesk’s platform; in June, Zendesk introduced its first combined offering for sales and customer service called Duet, which provides access to Sell and Support through a single paid customer.
We are raising our price target by $5 to $105, which is based on an 11.5x EV/R multiple applied to our updated C2020 estimate of $1.05B plus approximately $800M in prospective net cash and assumes ~124M fully diluted shares outstanding.
David Hynes Jr., Richard Davis, CFA, and Luke Morison, Canaccord Genuity Research, www.canaccordgenuity.com, July 31, 2019