Zuora: 45% Correction Since August Makes Sense

Dec. 07, 2018 6:37 AM ETZuora, Inc. (ZUO)5 Comments

Summary

  • Zuora remains down ~45% from their late August highs and this major correction has brought valuation back to a more reasonable level.
  • Q3 revenue of $61.6 million grew 33% and was ahead of consensus estimates for 27% growth, however this slowed down from 47% growth in Q2 and 60% growth in Q1.
  • Valuation has come back down to ~7.5x FY19 revenue and seems like a more reasonable investment at this point in time.

Zuora (NYSE:ZUO) had a fantastic start to their life as a public company, however, they now trade below the initial $14 IPO price. After reaching ~$35, ZUO has slowly contracted down to ~$18 after their most recent Q3 earnings. At face value, the earnings report was relatively strong and there were no major areas of concern. However, it appears investors expected strong growth from the company who grew their Q3 revenue 33% y/y to $61.6 million, which was already ahead of consensus expectations for ~27% y/y growth.

ZUO remains down ~45% from their late August highs and have been one of the biggest losers in the recent stock market correction. They currently trade ~10% below their post-IPO pop. Admittedly, their shares were very expensive when they were trading above $30 and were even expensive when they were above $25.

ChartZUO data by YCharts

Despite the ~45% contraction over the past few months, I believe investors have priced in more realistic expectations for the company and the stock is rather compelling at current prices. Over the long term, ZUO should be able to continue growing revenue 20-30% and see the margins expand as they scale.

General Overview

ZUO competes in the Enterprise Resource Planning (ERP) software market, which has historically been dominated by legacy players SAP (SAP) and Oracle (ORCL). These subscription-based companies are highly focused on managing the highly-visible recurring revenue streams which drive a large part of their valuation.

ZUO is a bit differentiated as they are a subscription software company that assists other subscription businesses by helping them manage their recurring revenue streams. So far, ZUO has been able to demonstrate their growth power, winning contracts with large enterprises such as Hitachi and Fidelity Investments.

Since going public earlier this year, ZUO has consistently traded at near the high

ChartZUO data by YCharts

This article was written by

Individual investor with hands-on experience in the equity markets. Largely focusing on Tech companies or major mispricings in the market.

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.

Recommended For You

Comments (5)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.