2023-07-19 14:31:25 ET
Summary
- Five9, Inc. is a beneficiary of AI's rise, as the pace of cloud migration for contact centers is expected to be faster and Fiv9 could raise prices for new AI offerings.
- But Five9's valuations have priced in AI tailwinds, with the stock currently trading at an estimated PEG ratio of 2.2 times.
- I award a Hold rating to Five9; while an AI play, its valuations are too demanding.
Elevator Pitch
My investment rating for Five9, Inc. ( FIVN ) stock is a Hold. The rise of AI should allow contact centers to achieve substantial cost savings by reducing the number of human call agents, and this should help to increase the penetration of cloud services in the contact center market which benefits FIVN. However, Five9's shares are not attractively priced, so I have decided to assign a Hold rating to FIVN. I will consider upgrading my rating for Five9 to a Buy if its price/earnings to growth or PEG ratio comes down to a more appealing 1.5 times.
Company Description
In its fiscal 2022 10-K filing , FIVN refers to itself as a "leading provider of intelligent cloud software for contact centers" with a "client base of over 2,500 organizations" as of the end of last year. Five9 was started in 2001 , and its shares have been listed on the Nasdaq since April 2014.
The Customer Value Proposition For Five9's Contact Center Cloud Software Solutions
Five9 generated 90% of the company's FY 2022 top line from the US, while foreign markets accounted for the remaining 10% of its revenue in the most recent fiscal year. Approximately 92% of FIVN's Q1 2023 revenue is recurring in nature, and enterprise clients contributed 86% of Five9's trailing twelve months' sales, as disclosed in the company's first quarter results presentation .
AI Is A Key Long-Term Growth Driver For FIVN
Five9 has a long growth runway ahead. The current market's consensus financial forecasts (Source: S&P Capital IQ ) for FIVN point to the company achieving a revenue CAGR of +23.4% and an EBITDA CAGR of +29.2% for the FY 2023-2027 period. In my opinion, Five9 is in a good position to meet the sell-side analysts' long-term growth expectations for the company. In particular, AI could be the catalyst needed to drive a much more rapid of growth for the contact center cloud software industry and FIVN.
There are a number of metrics that support my bullish view of Five9's growth prospects for the long run and the positive impact of AI on the company.
Firstly, the contact center cloud software market is currently underpenetrated. At Barclay's ( BCS ) June 5, 2023, investor event "Deep Dive on AI with Five9," FIVN highlighted that contact center is "still a market that is 20% in the cloud and 80% on-premise." Looking forward, the pace of migration to the cloud for contact centers is very likely going to accelerate with the rise of AI. As an illustration, contact centers can realize substantial expense reduction by replacing human agents with Intelligent Virtual Agents powered by AI in tandem with the cloud migration process. Specifically, Five9 noted at the Nasdaq Investor Conference (event transcript sourced from S&P Capital IQ ) on June 14 this year that labor represents around "80% to 90%" of the "estimated cost of running a contact center."
Secondly, Five9 has substantial room for price hikes by leveraging on AI. FIVN estimated at the William Blair Growth Stock Conference on June 8, 2023, that it could potentially double its per-seat pricing on a monthly basis from $200 to $400 with the introduction of Intelligent Virtual Agents as part of its cloud software solutions. At the mid-June Nasdaq Investor Conference, FIVN emphasized that Intelligent Virtual Agents are "the first of the 8 different products that we have," so that Five9's future per-seat pricing might be even higher than $400 following the roll-out of other AI-powered products.
Thirdly, FIVN's new AI offering, Intelligent Virtual Agents, is already delivering results for its clients, which bodes well for the company's business outlook. One of Five9's customers shared at Barclay's June 5, 2023, investor event "Deep Dive on AI with Five9" that the average time spent on calls at its contact centers decreased by 10% with the adoption of FIVN's Intelligent Virtual Agents.
But Five9's Valuations Are Unattractive
In the previous section, I touched on why I view FIVN as an AI play with a favorable growth outlook. However, positives for Five9 appear to have been factored into the stock's lofty valuations as detailed in this section.
Five9 is currently valued by the market at consensus forward the next twelve months' EV/EBITDA and normalized P/E multiples of 37.9 times and 48.1 times, respectively as per S&P Capital IQ data. Typically, a stock is deemed to be undervalued if its earnings multiple is below its expected earnings growth rate, and this isn't the case for FIVN. The consensus FY 2023-2027 EBITDA and normalized EPS CAGR estimates for Five9 are +29.2% and +21.9%, respectively. This implies that Five9's price/earnings to growth or PEG ratio is as high as 2.2 times. Even for a high-growth stock like FIVN, its PEG multiple shouldn't exceed 1.5 times in my view.
FIVN's valuations are also unappealing based on a peer valuation comparison. Five9's key peer NICE Ltd. ( NICE ) trades at a relatively lower consensus forward the next twelve months' EV/EBITDA and non-GAAP adjusted P/E multiples of 23.4 times and 27.7, respectively.
In a nutshell, Five9's shares aren't undervalued, so this isn't a compelling investment opportunity.
Closing Thoughts
Five9, Inc. is a play on AI with a favorable financial outlook. But positives are already factored into Five9's valuation, so a Hold rating for FIVN is appropriate.
For further details see:
Five9 Stock: Positives Are Priced In For This AI Play