2023-04-20 12:16:16 ET
Summary
- ZoomInfo Technologies Inc. was already reporting a GAAP profit even before it was ''cool'' to do so.
- The problem here is that ZoomInfo Technologies growth rates are rapidly slowing down. And investors will need clarity on its stable growth rates, before backing this stock.
- But there's more to this ZoomInfo Technologies Inc. investment thesis than a stock that's fallen in value. Here is what you need to know.
Investment Thesis
ZoomInfo Technologies Inc. ( ZI ) is a technology platform that empowers sellers and recruiters to reach the entities that make sales happen. It's often described as like LinkedIn of Microsoft Corporation ( MSFT ), but for contacts that you don't already know, but wish to reach out to.
Anyone that follows ZoomInfo will know that its crown jewel is that the business is highly non-GAAP profitable.
That being said, the issue here is that its stock is languishing. Therefore, management's stock-based compensation isn't worth as much as it once was. Consequently, ZoomInfo's management needs more stock-based compensation ("SBC") merely to retain executive talent.
Case in point: during Q4 2022, management's SBC was up 67% y/y, while revenues were a more muted 36% y/y.
Hence, unless ZoomInfo figures out some way to retain talent and stabilize revenues, without substantially increasing its SBC expenses, this business could soon start to report GAAP losses.
Why ZoomInfo? Why Now?
ZoomInfo provides intelligence and analytics to sales, marketing professionals, and recruiters.
With an integrated software stack, ZoomInfo unifies marketing and sales data while collecting information from contributors, the public domain, and first-party sources.
Think of it as a software platform that helps sellers reach decision-makers within an organization.
The go-to resource for locating relevant, current, pertinent, and reliable company information is ZoomInfo. Do you want to be sure who and how to contact key individuals? These facts are kept updated by ZoomInfo.
ZoomInfo boasts that it helps sellers from wasting time contacting the wrong contacts who drag out the sales process.
Indeed, part of the appeal of this investment thesis, as ZoomInfo's founder Henry Schuck consistently argues throughout ZoomInfo's earnings calls , is this,
Our customers are generating significant ROI and our users are reporting phenomenal results as they leverage the ZoomInfo platform.
Really, the bull case is that for the right organizations, ZoomInfo delivers tremendous ROI. That being said, it appears that as of late, ZoomInfo's net retention figures have been moving lower.
As you can see here, ZoomInfo finished 2021 with net retention rates of 116%, only to move lower to 104% in net retention rates twelve months later.
Altogether this leads me to discuss its outlook for 2023.
ZoomInfo's Prospects Don't Appear As Enticing
There's good news and bad news. The good news is that ZoomInfo's Q1 2024 is expected to grow mid-20s% against what was a very challenging comparable period in the prior year.
The bad news is that there's absolutely no doubt that ZoomInfo's growth rates are rapidly slowing down.
Naturally, this begs the question, can ZoomInfo's revenue growth rates stabilize this year? Because investors backing this stock expect to invest in a highly stable and predictable business. After all, that's why investors are being asked to pay a high premium for the stock.
And this leads me to the other key consideration.
Looking Under the Hood
ZoomInfo's balance sheet holds a net debt position of approximately $700 million.
Clearly, this is not a significant figure for a business that generated close to $400 million of free cash flow in 2022. That being said, it will encumber ZoomInfo's ability to continue its serial acquisitions spree.
More specifically, in 2021, ZoomInfo spent approximately $575 million on Chorus.ai, and in 2022 ZoomInfo acquired Dogpatch for approximately $150 million. These two acquisitions together make up just under 10% of its market cap.
Again, I wish to note, that while these acquisitions were not overly significant, the point here is that with its balance sheet already substantially levered it will prevent ZoomInfo from embracing any new acquisitions any time soon.
The Bottom Line
Today, we are in a very unforgiving market. Investors are asking questions first before investing. Then, after being satisfied with those answers, they'll contend that they'll prefer to wait for a larger discount.
Finally, when that discount shows up, investors argue that there's still too much uncertainty in the outlook. In short, there's a lot of pessimism percolating through the market.
But the time to become openly pessimistic on ZoomInfo Technologies Inc. has come and gone. Even if we grudgingly admit that ZoomInfo is probably fairly valued, I don't believe this is the time to give up on this company. Not now. The time to give up has gone. Now is the time to do the most challenging task of all, to remain patient with ZoomInfo Technologies Inc.
For further details see:
ZoomInfo: Who You Gonna Call? Not Us