2023-12-18 09:00:00 ET
Summary
- Fresh sale rumors are driving volatile swings in Five9 stock.
- In this note, we study recent business trends at Five9, and consider a potential sale - acquirers, deal price, etc.
- While I can see multiple potential buyers for Five9, I don't see why the company would look to sell itself at this moment in time, given its massive AI opportunity.
Introduction
Earlier this month, Five9, Inc. ( FIVN ) stock spiked from the $70s to the $90s on the back of fresh sale rumors popped up in a Bloomberg report . However, this bounce proved to be ephemeral, with the stock roundtripping back down to the $70s soon after a denial from the CCaaS (contact center as a service) company:
While Five9's press release clearly states that no deal is being pursued at this moment in time, the confirmation of an offer has certainly raised exit hopes among the FIVN shareholder base that's been bruising from the loss of >60% of market capitalization over the last couple of years:
In today's note, I will provide an updated view of Five9's business, and share my take on a potential sale of the company - deal price, acquirer, etc. Without further ado, let's jump straight in!
Checking Up On Five9's Business Trends
After experiencing tremendous growth in 2020-21, Five9 has seen rapid moderation in growth rates over the last several quarters amid an uncertain macroeconomic environment and industry-wide softness in the contact center software market.
That said, Five9's Intelligence CX platform remains one of the top CCaaS platforms in the marketplace, with Gartner naming Five9 as a "Leader" in its magic quadrant for CCaaS once again in 2023.
While Five9's DBRR (dollar-based retention rates) are trending in the wrong direction, the contact center company is still extracting more dollars out of its existing customers at a decent rate of 110%. I view this data point as a solid sign of Five9's platform stickiness and continued innovation at the company.
In a strategic shift, Five9 has been moving upmarket in recent quarters. While top-line numbers have benefitted from strong growth in enterprise customers, Five9's gross and operating margins have come under pressure.
Over the last couple of years, Five9's gross margins have declined from ~60% to ~52%, with operating margins seeing a similar decline from near breakeven to -10%. Despite facing some margin pressures, Five9's cash generation has improved significantly, with TTM's operating cash flow margin standing at 14.7% as of Q3 2023.
While Five9's revenue growth has slowed down to the mid-teens (and it is projected to deliver a similar level of growth in 2024), management is confident about ongoing enterprise expansion and Five9's AI solutions powering a growth re-acceleration in upcoming years.
Along with the latest earnings release, Five9's management shared a revised long-term operating model that pegged 2027 revenues at $2.7B (implying a 5-year revenue CAGR of >25%), non-GAAP gross margins at 70%+, and adj. EBITDA margins of 23%+.
Artificial intelligence represents a huge disruption opportunity for the Contact Center as a Service market, and as a modern AI-focused CCaaS platform, Five9's Intelligent CX platform is likely to be a big winner in the era of AI. Given management's robust guidance, I find it hard to believe that Five9 wants to be sold at this moment in time. However, let us try to figure out who can buy Five9 and at what price if a deal were to materialize.
What Could Five9 Fetch In A Buyout?
From a relative valuation standpoint, Five9 (trading at ~6.7x P/S) currently commands a significant premium to its peer set. That said, Cisco is acquiring Splunk ( SPLK ) at ~7x P/S, which is a SaaS company that has a financial profile (growth & margins) akin to Five9.
Now, we shall evaluate Five9 on an absolute basis using reasonable long-term projections based on management's target operating model and our understanding of Five9's business.
According to my model, Five9 is worth ~$89 per share (or $6.55B in market cap). In any buyout, Five9 shareholders would expect to get a premium, and given that Five9 is slightly undervalued, a 15-20% premium from the current market price seems plausible.
Potential Acquirers of Five9
Assuming a buyout price of $7.5-8.0B (including a 15-20% premium), the acquirer pool for Five9 can be filtered down to a handful of large/mega-cap tech names and private equity firms that can execute a deal of this size in the current financial environment.
Back in mid-2021, Zoom agreed a deal to buy Five9 for roughly $15B in an all-stock deal, which ultimately failed due to shareholder rejection. We discussed this deal in detail in this report - Zoom Stock: Acquisition Of Five9 Could Be A Needle-Mover (NASDAQ: FIVN) . At that time, a Zoom-Five9 merger made a ton of strategic and financial sense. However, Zoom has since developed its own Contact Center platform and is now a direct competitor to Five9. Furthermore, Zoom's market cap has dropped far more than that of Five9 over the last couple of years, which means any deal now would be a lot more expensive for Zoom. Hence, I do not see Zoom going back in for Five9, and despite suggestions that Zoom was the unnamed bidder again this time around, I believe in Kelly Steckelberg's dismissal of these claims at the Barclays Global Technology Conference :
So, lots of news the last few days. Somebody asked me, this morning, why aren't we rekindling our Five9 deal. And I'm here to say we are not rekindling our interest, We highly respect them, they're an amazing company. We have high regard to them, but we are really focused on building the main contact solutions on our own. And there was other news this morning about our new tiered pricing approach that we are putting in place which highlights our commitment to building a true enterprise-grade contact center platform. So, the product there's it's also another thing. Because we are so focused on this, actually, our leadership team is now managing the contact center team. So, we've done a slight reorg within the organization and pulled that in and it's really exciting to see and I think we'll just help continue the focus, commitment, and exploration of this product.
But it's doing well. We announced on our call a few weeks ago that we're over 700 customers and there are some great features and functionality that already exist today and some that are coming, they're either in beta or will be released later this year. And what we announced is kind of pretty standard in industry-tiered pricing in terms of how you move up depending on your needs of the product in price and industry.
- Kelly Steckelberg, Zoom's CFO
With Zoom out of the picture, other major UCaaS (unified communications as a service) providers like Microsoft ( MSFT ) and Alphabet ( GOOGL ) could emerge as strategic buyers given their absence from the CCaaS market. In the era of AI, data is the new oil, and Five9's data in combination with say Microsoft Dynamics' data can create a transformational AI-powered contact center platform. Additionally, Microsoft can move over all of Five9's workloads to Azure, boosting its cloud business. We can make a similar strategic case for Google, and even Salesforce ( CRM ). Other potential strategic acquirers could be old-school tech titans like Cisco ( CSCO ) and Oracle ( ORCL ) that are looking to grow their cloud enterprise software presence.
In addition to these strategic buyers, I believe many tech-oriented private equity firms would be interested in a buyout deal for Five9 at its current undemanding valuations. According to a recent report from the Financial Times, the private capital industry is sitting on $4T in dry powder [cash]. While Five9 is an unprofitable company on a GAAP basis, the business is growing at a healthy pace and generating positive free cash flow. Hence, FIVN could easily attract some of that private capital.
Concluding Thoughts
While there are no guarantees, Five9 should be able to find a buyer if it wants to be sold, given its healthy business fundamentals and robust future projections. Five9 has a humongous AI opportunity in front of itself, which means the timing of this sale is completely off. I can't see any motivation to sell right now, and buyers are unlikely to pay a significant premium given the current conditions in the financial markets. Therefore, I expect Five9 to continue operating independently for the time being.
Considering Five9's valuation and long-term risk/reward (expected 5-yr CAGR: ~18%), I continue to rate Five9 stock a "Buy" for long-term investors.
Thanks for reading! If you have any questions or concerns, please feel free to share them in the comments section below.
For further details see:
Five9: A Buyout Is Possible But Unlikely