2023-05-03 12:21:43 ET
Summary
- AI continues to attract hope and fear across Wall Street and Main Street.
- Zeta Global features a low valuation considering its EPS and FCF growth outlook, and it has earnings Thursday night.
- While I view shares as undervalued, I spot key technical risks.
Artificial Intelligence ((AI)) continues to draw optimism, awe, and fear all at the same time. Just this week, textbook seller Chegg (CHGG) plunged as it said AI and chatbots were negatively impacting its sales. While the future is unknown, firms that can pounce on generative AI technology could see rapid growth.
I have a buy recommendation on shares of Zeta Global (ZETA), but I caution investors to buy the dip given technical risks. A bullish earnings and free cash flow growth backdrop is paired with a cautious chart ahead of Q1 earnings Thursday night.
Chegg Shares Plunge As ChatGPT Eats Into The College Textbook Business
According to BofA Global Research, ZETA is a provider of proprietary customer data, marketing technology, and advertising technology that enables its users to drive good customer engagement and better ROI for its marketing and advertising budgets. The company's technology can deliver campaigns through multiple engagement channels such as email, display, social media, and connected TV.
The New York-based $1.9 billion market cap Application Software industry company within the Information Technology sector has negative trailing 12-month GAAP earnings and does not pay a dividend, according to The Wall Street Journal.
Earlier this week, ZETA introduced its own generative AI service that targets marketers. The program aims to solve many business-critical questions and go-to-market strategies. Zeta Co-Founder, Chairman, and CEO, David A. Steinberg stated:
“For years, we have known that the rise of generative AI would be a paradigm shift, raising the bar for business growth acceleration. That is why the underlying DNA of the Zeta Marketing Platform has been built on AI since inception. Today we are thrilled to build upon our foundation with ZOE and develop innovations that will redefine how marketers improve strategy, connect with their customers, and deliver stronger return on their investments.”
The stock did not react to the release. In fact, shares plunged on Tuesday amid Wall Street plunge ahead of the Fed’s rate decision.
Back in February, the firm beat on earnings with a smaller-than-forecast EPS miss while growing revenue by nearly 30% year-on-year. Its FY 2023 sales guidance was well above the street’s consensus. The firm targets free cash flow of at least $110 million by 2025. With a growing FCF figure over the last several quarters, it appears that the trajectory is on track. We will know more after Thursday’s Q1 release.
High average revenue per user growth and a rising customer base along with impressive adjusted EBITDA growth over the past year make the growth trajectory impressive. A key risk, though, is if business enterprise spending dips amid a weaker macro backdrop, but the firm is positioned well to continue gaining market share in the space.
Zeta's Free Cash Flow Target: A Track Record of Growth
On valuation, analysts at BofA see earnings rising a strong 42% this year with more strong bottom-line gains in 2024 and ‘25. The Bloomberg consensus is not as sanguine, however. No dividends are expected to be paid any time soon, but free cash flow, mentioned earlier, is in the black. With an operating P/E of 28.6, the stock has a very reasonable forward PEG of 0.8 - below the 1.6 sector average.
I also peeked at ZETA’s historical price-to-sales trend, and that multiple is near the middle of its range since the IPO in 2021. Given the rapid growth outlook, if we assign a PEG of 1.2, closer to the sector median, then the stock should be near $13.90.
ZETA: Earnings, Valuation, Free Cash Flow Forecasts
ZETA: Forward P/S Multiple Near The Company's Average
ZETA: An Attractive PEG and P/S Given 20%+ EPS Growth Ahead
Seeking Alpha
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q2 2023 earnings date of Thursday, May AMC with a conference call immediately after results cross the wires. You can listen live here . ZETA’s annual shareholder meeting takes place on Friday, June 9.
Corporate Event Risk Calendar
The Options Angle
ZETA does not have a long history, but the stock has topped analysts’ earnings expectations in the past two quarters. Overall, shares have traded higher post-reporting in three of the last five earnings dates. This time around, the consensus EPS forecast is $0.05 and implied volatility is high at 80%, according to data from Option Research & Technology Services (ORATS).
ZETA: Limited Earnings History, High Implied Volatility
The Technical Take
While I like the growth story and see shares having fundamental upside, the chart is concerning. Notice in the graph below that the stock broke the rate of trend dating back to the July 2022 low. That is when many software stocks bottomed. A rounded top pattern is also in play, and I see support near the rising 50-day moving average currently at $8.35. Moreover, $8.50 is about where the 38.2% Fibonacci retracement comes into play.
Also notice a healthy amount of volume by price starting in the mid-to-high $8s that should cushion further downside. A limit buy near $8.60 with a stop under $8 would be a reasonable idea from a risk management perspective. My fundamental target coincides with the all-time high of $13.46 from a year ago.
ZETA: Bearish Rounded Top, Targeting $8.50
The Bottom Line
ZETA has a robust growth plan and is currently free cash flow positive. I see the stock as undervalued, but a ‘buy the dip’ strategy is a prudent play given the bearish technical trend break.
For further details see:
Pouncing On The AI Boom: Zeta Global Undervalued Ahead Of Earnings