Zendesk Inc

ZEN Details

Zendesk Inc (NASDAQ: ZEN) is a service-first CRM company that is engaged in developing software which is designed to improve customer relationships.

Q2FY21 Results Performance (For the Quarter Ended 30 June 2021)

Healthy Growth in Revenue: The company has posted  revenue growth of 29% YoY to $318.2 million in Q2FY21 driven by its success with customers. It witnessed sustained strength in sales to its enterprise customers and both net bookings and RPO dollars reached record levels. Its overall RPO rose 58% YoY as well as its net expansion rate rose to 120%.

Increase in Losses: Its GAAP operating loss widened to $42.4 million from $31.5 million in the pcp with GAAP operating margin  down by 50 bps YoY to -13.3% owing to the impact of higher personnel costs due to sustained investment in its business. Further, its GAAP net loss increased to $58.4 million in Q2FY21. 

Key Data (Source: Company Reports)

Key Executive Appointments

The company has undertaken various strategic appointments to its leadership team and Board of Directors as it positions itself for sustained growth. ZEN has appointed Alex Constantinople as Chief Marketing Officer. Besides, it inducted new board members Brandon Gayle and Steve Johnson to its Board of Directors, effective March 31, 2021.

Outlook

The company, on 29 July 2021,  provided guidance for Q3FY21 as well as for FY21. It expects to achieve revenue between $332 - $337 million in Q3FY21 with GAAP operating loss to remain in the range of $(43) - $(39) million including the share-based compensation and related expenses of around $63 million and amortization of purchased intangibles of around $2 million.

For FY21, the company expects revenue to stay between $1.310 - $1.318 billion. Further, it forecasts GAAP operating loss to remain in the range of $(164) - $(159) million, taking into consideration the share-based compensation and related expenses of approximately $249 million as well as amortization of purchased intangibles of around $7 million, acquisition-related expenses of approximately $3 million, and real estate impairments of around $1 million.

Key Risks

The company’s performance is exposed to various risks like a failure in its ability to adapt its products to changing market dynamics. Further, its significant dependency on its customers renewing their subscriptions,  purchasing additional subscriptions and the intensely competitive market in which Zendesk operates, also remains a concern.

Valuation Methodology: Price/Sales Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

We have valued the stock using a Price/Sales multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low double-digit (in % terms). We have assigned a premium to Price/Sales Multiple (NTM) (Peer Average) considering its record bookings as well as acceleration in revenue in Q2FY21, increased adoption of Zendesk Suite that more than doubled in Q2FY21 over Q1FY21. The company has highlighted that the robust bookings, as well as acceleration in RPO and Suite demand will aid in driving stronger, more predictable revenue growth in the long term.

Considering the aforementioned factors and the associated business risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $127.57 per share (10:36am EDT New York Time, USA) as on 5^th August 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.