2023-05-16 21:34:12 ET
Summary
- ZoomInfo has a strong track record of growth as well as excellent unit economics that are still improving.
- The company has been operating profitably and is cash efficient, bringing in 1.64x as much as operating cash flow as operating income last quarter.
- It also has a large total addressable market and a growing suite of products.
- Along with these factors, the stock doesn't have an expensive long-term forward valuation and is a good growth buy in my book.
Overview
ZoomInfo Technologies (ZI) is a fast-growing B2B sales and customer intelligence software company. While growth moderated earlier this year for ZoomInfo just as it has for the technology sector overall, ZoomInfo’s latest quarter still showed a healthy 24.41% revenue growth y/y for the first quarter of this year. The company also continues to generate operating and free cash flows, with quality growth in these metrics projected even in light of lower growth estimates for the year. This article will review ZoomInfo’s financials as well as my forward-looking view for the stock.
Fundamentals
Prior to this year ZoomInfo put up 4 years of excellent growth while having crossed the $1B yearly revenue mark in 2022.
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Even with the relatively strong quarter, ZoomInfo management is forecasting a growth rate of only 17% for the current year. While this is a steep drop-off from growth rates that the company has been seeing, it seems reasonable owing to the current B2B technology spend slowdown as well as the overall macro environment. This guidance has come along with an expression of confidence that the firm can return to levels of higher growth once the economy returns to normal.
With that backdrop, we continue to drive a leading combination of growth and profitability, while approximately 40% of our revenue comes from software companies. When you incorporate financial services, venture-backed companies and the broader technology space, the majority of our customers are being impacted by the current economic environment. We are confident that when there is a more stable and certain economic outlook, we will see even higher levels of growth accompanied by even stronger profitability.
Source: Q1 2023 Transcript Seeking Alpha
Given the firm’s success with its product to date, as well as its large total addressable market, I think this is a credible assumption. This would, however, be contingent on B2B tech spend recovering to its pre-slowdown levels in 2024 – a metric that may not necessarily end up tracking closely with the economy at large.
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Throughout its recent growth ZoomInfo has also seen increasing gross and operating margins. Slowly and steadily, ZoomInfo hit consistent 87% margins while recently showcasing its best-yet gross margin of 88.36%.
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Operating margins were also their best since Q2 2021. Notably the company chose to increase SG&A almost 1% last quarter while having decreased R&D expense materially. This looks like a tactical investment to accelerate present growth while allocating less expense for the truly long-dated growth that is enabled by research & development. Even with that increase, ZoomInfo managed to increase operating margin a full 4% q/q.
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Net margin has also been the best that we’ve seen in 5 quarters, notably increasing about 3% more than the quarterly increase on net margin.
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Cash from operations has been relatively volatile but still over $100M for 4 out of the last 5 quarters.
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From the financials it becomes clear that ZoomInfo is a software business that has crossed the threshold into consistent profitability and operating cash flow generation. This is fairly recent, as the company only became profitable in 2021. Notably, it has been generating operating cash flow since before its Q2 2020 IPO.
Given the company’s scale and margin profile I am confident that it can maintain its gross margins while continuing to increase operating margin. This should coincide with increased operating cash flow as that is what the business produces now. Last quarter, operating cash flow was $109 on an operating income of $66.4 – a 1.64x premium.
Forward-Looking Estimates
Modeling these fundamental metrics into the future provides an estimated growth valuation for the firm. I assume that ZoomInfo will grow 17% this year and a return to 24% growth next year, while then growing at a CAGR of 24% for 4 years before dropping off to an 18% CAGR until 2032. 2032 is assumed to be a ‘terminal growth’ year in which the company loses double digit growth and starts trading further away from growth multiples.
Pricing shares on an operating cash basis, we can estimate the value ZoomInfo stock for 2027 and thereafter. Using the forward communication services sector price/op cash flow multiple of 8, we can establish a floor value for ZoomInfo stock if it is going to be trading with these fundamentals at sector median multiples. Since it may continue to trade as a growth stock and exceed sector median multiples the share price could end up significantly higher.
Overall this leads me to conclude that ZoomInfo is not priced too far into the future and hits projected floor value in a little over 4 years. This makes it a cheap growth stock for a 10 year horizon.
2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Share Price | $21.70 | $21.70 | $21.70 | $21.70 | $21.70 | $21.70 | $21.70 | $21.70 | $21.70 | $21.70 | $21.70 | $21.70 | $21.70 |
Shares Outstanding | 173.80 | 403.30 | 404.10 | 404.90 | 405.70 | 406.52 | 407.33 | 408.14 | 408.96 | 409.78 | 410.60 | 411.42 | 412.24 |
Shares Growth Y/Y | 132.05% | 0.20% | 0.20% | 0.20% | 0.20% | 0.20% | 0.20% | 0.20% | 0.20% | 0.20% | 0.20% | 0.20% | |
Shares Float % | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% |
Mkt Cap At Current Price | 3.77 B | 8.75 B | 8.77 B | 8.79 B | 8.80 B | 8.82 B | 8.84 B | 8.86 B | 8.87 B | 8.89 B | 8.91 B | 8.93 B | 8.95 B |
Revenue | $476.2 | $747.2 | $1,098.0 | $1,284.7 | $1,593.0 | $1,975.3 | $2,449.4 | $3,037.2 | $3,583.9 | $4,229.0 | $4,990.2 | $5,888.5 | $6,182.9 |
Revenue Growth Y/Y | 17% | 24% | 24% | 24% | 24% | 18% | 18% | 18% | 18% | 5% | |||
Operating Income | $60 | $153 | $183 | $284 | $430 | $533 | $661 | $820 | $968 | $1,142 | $1,347 | $1,590 | $1,669 |
Operating Margin | 12.60% | 20.53% | 16.68% | 22.08% | 27.00% | 27.00% | 27.00% | 27.00% | 27.00% | 27.00% | 27.00% | 27.00% | 27.00% |
Op Cash Flow | $170 | $299 | $417 | $465 | $705 | $875 | $1,085 | $1,345 | $1,587 | $1,873 | $2,210 | $2,607 | $2,738 |
Price/Op Cash Flow | 22.24 | 29.23 | 21.03 | 18.89 | 12.48 | 10.09 | 8.15 | 6.59 | 5.59 | 4.75 | 4.03 | 3.42 | 3.27 |
Implied Share Price at FWD Sector Multiple | $26.36 | $31.04 | $36.56 | $43.05 | $50.70 | $53.13 |
Source: Excel, Seeking Alpha
Conclusion
ZoomInfo’s top-notch economics, growing product suite, and large total addressable market are all excellent things to have for a technology growth stock. Combine this with its capital-efficient business model and its capacity to generate operating cash flow and I’m sold. ZoomInfo stock is a good growth buy for the long term.
For further details see:
ZoomInfo: Good Long-Term Growth Stock With Great Margins