2023-05-16 13:15:47 ET
Summary
- In spite of a ~20% correction so far this year, ZoomInfo stock still hasn't unwound all of its premium valuation.
- The software company is seeing slowing growth, which makes it difficult to justify its >7x forward revenue multiple.
- Though profitable from both an adjusted and GAAP basis, ZoomInfo's earnings are still too thin to support its valuation.
- The company faces stiff competition from other sales and marketing-oriented software platforms.
Now is not the time to invest in growth stocks trading at a premium valuation. The tech rout over the past year has rendered many companies as attractive "growth at a reasonable price" plays - there's no need to pay top dollar for growth anymore. And amid market volatility, the best move that investors can make today is to continue stock-picking aggressively for these names with strong fundamentals and enough runway from a valuation perspective to rebound.
ZoomInfo ( ZI ), in my view, hasn't fallen far enough yet this year. This growth software stock has suffered a ~20% year to date correction - but at the same time, I'd argue that its fundamental quality has degraded by at least that much since the start of the year, owing to huge deceleration in its growth rates. The company's recent Q1 earnings, released in early May, don't give me much confidence in the balance of the year either.
ZoomInfo doesn't have too much in its corner to support a bullish recommendation
I'm retaining my neutral opinion on ZoomInfo, which I flipped from a prior bearish position just in April. I continue to advocate for a watch-and-wait strategy on this name, and I don't think ZoomInfo becomes buyable (at least not without a real margin of safety) until the stock tilts into the high teens.
Now, of course, a lot of the company's recent slowdown and pessimism is macro oriented. Sales momentum is slowing down around the software industry, especially for sales and marketing-related software, as these roles are being quickly eliminated at many companies experiencing growth chills. Taking a step back from the long-term view for ZoomInfo, the bright side is that the company's expansion into new product categories such as talent and recruiting have ballooned the company's TAM beyond $100 billion:
That being said, we do have to ask: If the company's market opportunity is truly that wide, and its current revenue is only ~1% penetrated - then we probably shouldn't be seeing as big of a slowdown as we are.
I continue to view the bull and bear theses for ZoomInfo as quite relatively balanced.
The positive drivers for ZoomInfo are:
- Growth at scale. The fact that ZoomInfo so far has been able to sustain >30% y/y growth after reaching a >$1 billion annualized revenue scale is quite impressive.
- Strong pro forma operating margin profile. ZoomInfo has long generated profits, even on a GAAP basis - which is a rarity for a company growing as quickly as it does.
- Recurring revenue and expansion potential. ZoomInfo sells its products as a subscription, with embedded expansion opportunities due to its seat-based pricing.
And the counter to these strengths are the following red flags:
- Deceleration is kicking in. In this recessionary environment, companies are cutting back on growth plans and letting salespeople and recruiters go - the exact clientele that uses ZoomInfo's database products.
- Large debt load. Unlike many tech peers, ZoomInfo is in a net debt position, and its floating debt structure exposes it to high interest costs. To offset this, however, ZoomInfo does generate strong unlevered free cash flows.
- Stiff competition. ZoomInfo is one of many CRM-style products and competes with much more recognizable names such as Microsoft's ( MSFT ) LinkedIn and Salesforce ( CRM ).
Valuation check-up
At current share prices near $22, ZoomInfo trades at a market cap of $9.25 billion. After we net off the $626 million of cash and $1.35 billion of debt on ZoomInfo's most recent balance sheet, the company's resulting enterprise value is $9.95 billion.
Meanwhile, for the current fiscal year, ZoomInfo has retained its prior guidance of $1.275-$1.285 billion in revenue, representing just 16%-17% y/y growth, while it has inched up its pro forma EPS guidance by a penny to $0.99-$1.01:
This puts ZoomInfo's valuation multiples at:
- 7.8x EV/FY23 revenue
- 22.4x forward P/E
I'm retaining my price target of $17 for ZoomInfo, which represents a 6x revenue multiple and 17x P/E. Until then, I don't think the company has enough fundamental merit - especially with its recent growth slowdown - to merit much more of a premium.
Q1 download
Let's now go through ZoomInfo's most recent quarterly results in greater detail. The Q1 earnings summary is shown below:
ZoomInfo's revenue grew 24% y/y to $300.7 million, largely in-line with Wall Street's expectations but decelerating sharply from 35% y/y growth in Q4.
CFO Cameron Hyzer noted on the Q1 earnings call that the company faced many of the same macro issues as other software companies, including elongation of deal cycles and higher executive scrutiny on major software purchases. Per Hyzer's prepared remarks:
The majority of our customers operate in industries meaningfully impacted by the current economic environment, including software, other technology and financial services. and all customers are scrutinizing spending across vendors. This backdrop makes the starting point for renewals and upsells more challenging, impacting overall sales efficiency and putting downward pressure on NRR.
As contemplated in our guidance, net retention activity was incrementally worse than what we experienced in Q4, while new sales were roughly flat relative to Q1 2022, slightly better than what we contemplated in the guidance. This better sales performance was partially offset by increased revenue reserves related to write-offs among our S&P customers.
With this performance and more visibility into the remainder of the year, we are reaffirming our previously provided full year guidance."
It's worth noting as well that ZoomInfo derives 40% of its revenue from fellow software companies. With tremendous macro strain on the software industry, particularly impacting sales and marketing departments, it's tough to say that ZoomInfo is close to the light at the end of the tunnel.
From a profitability perspective, the company grew adjusted operating income by 26% y/y to $120.3 million, representing a 40% adjusted margin: One point better than 39% in the year-ago Q1, but two points worse sequentially versus 42% in Q4.
Note that in spite of its growth slowdown, ZoomInfo has not announced broad layoffs like many of its peers and clients in the software industry.
Key takeaways
With ZoomInfo's growth expected to slow down even further to the teens in the back half of this year, I don't see much justification in paying a >7x forward revenue multiple for this stock. Yes, long term the company's suite of sales tools captures a large market opportunity, but in the near term, sales momentum will be challenged. Keep this on your watch list, but don't rush in.
For further details see:
ZoomInfo: Too Expensive To Consider Now