Zendesk (Ticker: Zen)
The market for growth stocks has been red hot - and that goes triple for the hottest part of the market (Enterprise SaaS). Unfortunately, or fortunately for us, that bull run excludes the premier company Zendesk!
Zendesk primarily sells a CRM suite based around customer service. Their ticketing system automates time consuming processes relating to customer response & their other suite functions help all aspects of customer service (from call centers to self-service solutions). Their value proposition is all the more obvious when we consider its DBNE rate of 120% in the most recent quarter (at the top of its range & accelerating from previous quarters).
Zendesk is also uniquely positioned because of the sheer success of its land & expand strategy. It derived 30% of its revenue from companies spending more than 250000, and that number continues to grow. This level of achievable scale demonstrates its future pricing power & lays out a realistic pathway for long-term growth.
On a valuation basis, Zendesk is incredibly undervalued compared to its peer group. On a P/S basis, with a ratio of under 13, and expected sales growth of over 25% for the foreseeable future, this company is impossible to compare to any similar competitors. A similar SaaS company (though admittedly in a different business sector for its software), that is putting up 25% growth trades for around 18 p/s (Ticker:Plan).
This brings me to the next factor - profitability & cash flow generation. Though not currently profitable, it should achieve that mark just this year. That achievement should be a changing point for the stock as it begins to derive an increasingly impressive profitability number as it monetizes its extremely strong 80% gross margin. This represents the perfect time to purchase the company - right before it enters its long-term profit generation story, and while it is undervalued on a sales basis at the same time.
The best part about all of this is that, despite having been unprofitable for a long time, the company has been consistently generating positive cash flow, allowing it to have a very strong balance sheet, with ~200 mil. in current assets vs. debts.
Overall, Zendesk represents one of the best opportunities in the SaaS industry, and provides the best way to get into growth stocks at a cheap valuation!
By: Mateo Gjinali
Comments