Zendesk: At Nosebleed Highs

Apr. 08, 2018 11:00 AM ETZendesk, Inc. (ZEN)
Gary Alexander profile picture
Gary Alexander


  • Zendesk has soared to all-time highs above $45 in 2017, appreciating more than 30% amid a broad market tumble.
  • The company was buoyed by a recent announcement that it crossed a $500 million run-rate for the first time, effectively ensuring that it will exceed Q1 guidance.
  • Revenues are expected to grow 30% y/y this year.
  • Shares look prohibitively expensive, however, at 7.7x forward revenues as loss margins continue to run high despite the growing revenue base.
  • Zendesk faces mounting competition in the service center SaaS space.

Zendesk (NYSE:ZEN), the customer-service software company, has been riding on a wave of fortune lately. The company is plowing on toward a $5 billion market cap, putting it far above the pack of average high-growth software companies. Since its IPO in 2014, original investors have made 5x on the company's starting IPO price of $9 - not a bad return at all for holding the stock a couple of years.

Year to date, Zendesk has gone up an astounding 33% versus a loss of -3% for the S&P 500:

ChartZEN data by YCharts

By all means, some of Zendesk's gains are well-deserved. The company has seen massive revenue growth and become a powerhouse in its space. For the unfamiliar, Zendesk provides a cloud-based software program that helps enterprises set up customer service portals. Its flagship offering, Zendesk Support, is the industry-leading application for handling customer service tickets. A screenshot of the agent interface, taken from Zendesk's website, is shown below:

Figure 1. Zendesk interface

Source: Zendesk.com

But despite Zendesk's recent success, the vaulting stock price begs the question: is Zendesk overvalued? With a few precious exceptions, as SaaS companies grow larger, the growth begins to decelerate quickly and the stock is suddenly no longer worth double-digit revenue multiples as it was back in the days immediately post-IPO. Despite the fact that Zendesk is a fantastic company with strong potential, its valuation at the moment has reached beyond the fundamentals and is due for a pullback.

Growth on the cusp of deceleration, with profits far from sight

Here's a look at how Zendesk's growth trajectory has fared over the past five years:

Figure 2. Zendesk income statement

Source: Zendesk 10-K

In FY17, the company grew revenues 38% y/y to $430.5 million. Don't get me wrong: that's tremendous growth for a company of its size, but the valuation (which

ChartZEN EV to Revenues (Forward) data by YCharts

This article was written by

Gary Alexander profile picture
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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