Is Zendesk a buy?
It’s time to talk about another software name. Here is the breakdown on $ZEN, otherwise known as Zendesk.
Current Price: $145.36
52/Wk High: $154.24
52/Wk Low: $50.23
Market Cap: $17.0 Billion
Read below for the breakdown!
Zendesk ($ZEN) is a major software services company that develops software solutions for support, sales, and customer engagement. In general, Zendesk's solutions help companies manage customers and their relationship with customers.
Throughout the past year, Zendesk has continued to grow through and benefit from the COVID-19 pandemic, given the massive digital shift that is just getting started. In fact, in just the past year, Zendesk stock has run over 68%.
Breaking down Zendesk’s software offerings, the company offers solutions for a variety of sectors including financial services, government, manufacturing, retail, telecommunications, education, and much more.
Zendesk’s customer list is impressive as well, boasting major companies and institutions such as Cabify, Cybrary, DroneDeploy, Panda Restaurant Group, SMC, Western Michigan University, and much more.
Shifting into earnings, Zendesk beat Q3 2020 expectations with an EPS of $0.17, better than the expected EPS estimate of $0.11. On a year over year basis, EPS has improved 41.67%.
Zendesk also reported Q3 revenues of $262 million, representing a 24% increase on a year over year basis. For context, the 2019 Q3 revenues level was $210.477 million.
Gross profit improved as well, totaling $199.107 million, much better than the same time 2019 level of $151.267 million. As for gross margin, Q3 gross margin totaled 76%, better than the previous years gross margin level of 71.9%.
On the downside, Zendesk continued to turn an operating loss of $28.326 million. Although, it is better than the Q3 2019 operating loss of $35.428 million.
Operating margin also continues to run into the negative, landing at -10.8% for Q3 of 2020, although it is better than the previous year's level of -16.8%.
One of the major downsides to the report was that net loss continued to grow greater, totaling $40.703 million, worse than the 2019 Q3 net loss level of $32.224 million.
Getting back to the positives, remaining performance obligations recovered in Q3, growing 43% on a year over year basis. Furthermore, long-term RPO increased 56% and short-term RPO increased 39%.
When it comes to guidance, management is bullish, expecting Q4 2020 revenues to total $274 million to $279 million. For the full year, management expects FY 2020 revenues to total $1.020 billion to $1.025 billion.
Shifting into the balance sheet the numbers need work.
Total Debt: $1.056 Billion
Total Liabilities: $1.624 Billion
Total Assets: $2.054 Billion
Cash & Short Term Inv: $943 Million
On a valuation basis Zendesk does trade at a premium.
Price to Sales: 17.59x
Price to Book: 39.81x
Management has work to do as well.
Return on Equity: -42.50%
Return on Assets: -10.49%
Return on Invested Capital: -15.03%
Given the numbers the analysts are bullish with a mean price target of $151.64/share, representing a 4.32% gain.
It is also important to note that the high price target is $175.00/share, representing a 20.39% upside, while the low price target is $113.00/share, representing a -22.26% downside.
The big money is also quite involved, with 97.31% of Zendesk being owned by institutions. Top holders include The Vanguard Group, T. Rowe Price Associates, and Janus Capital Management.
On a technical basis Zendesk maintains its bullishness but could be presenting opportunity. According to the six-month charts the MACD recently turned to the downside with minimal momentum around 3.37.
The six-month charts are also indicating an RSI of 53.25 and CCI of 13.05, both of which recently started to trend to the downside.
In short, Zendesk is a solid company for the long term, but has a series of issues to work out such as the balance sheet and maintaining strong growth.
EAT - SLEEP - PROFIT
Disclaimer: This is not direct financial advice, simply an opinion based on independent research.