ZUO - Zuora: A Company With Potential Issues And A Takeover Ready Valuation
2024-02-01 19:30:11 ET
Summary
- ZUO’s revenue growth has been strong during the last decade (+22%), although there appears to be a slowdown to low single-digits in recent peers.
- Despite consistently upselling its existing customer base, we feel ZUO is struggling with competitive pressures, restricting its ability to acquire customers at a considerable rate.
- This has restricted its ability to progress margins to the level expected by investors. We believe ZUO can reach an adj. EBITDA-M of ~15%.
- ZUO’s financial performance is underwhelming relative to its peers, although the business should be able to close the gap over time. It is critical that it maintain its upselling momentum.
- ZUO’s valuation is heavily depressed, with a >150% discount to its peers. We believe this, alongside its NTM FCF yield of 5%, makes it an attractive takeover target, protecting downside risk.
Investment thesis
Our current investment thesis is:
- ZUO is a market leader, ensuring it should progressively grow over time with limited churn, even if this lags behind its peers. This should drive incremental margin improvement through operating cost leverage, increasing its attractiveness.
- We struggle to see how ZUO can gain market share and reach an attractive financial profile, but this is less important at its current valuation. All that is required is a continuation of its mild trajectory when its FCF yield is ~5%.
- At this valuation, ZUO is an attractive takeover target, as it will (likely) enhance the acquirer’s FCF yield while giving them deep expertise and a sticky customer base. If the stock were to decline further, the likelihood of a takeover succeeding at a premium valuation grows.