Zuora Is Worth A Shot Near $15 Per Share

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About: Zuora, Inc. (ZUO)
by: Lukas Wolgram
Summary

Zuora is at the forefront of the subscription based economy.

Zuora could be to subscription companies what Shopify is to e-commerce companies.

The recent share price selloff is an opportunity to get long this new economy player.

Introduction

Zuora (ZUO) is a subscription-based company helping other subscription-based companies. They sell a subscription to two main flagship products: Zuora Billing and Zuora RevPro. The company also offers professional services, which according to the most recent 10-Q, includes fees from consultation services for configuration, data migration, and integration. Finally, the company also has a marketplace where customers can purchase various additional applications and features.

Brief Share Price History

Chart Data by YCharts

If you look at a chart of Zuora, you'll see that the company IPO'd at $14.00 per share back in early 2018. Immediately upon trading the stock held in the low $20s. After a few weeks the stock skyrocketed into the mid- to high-$30s but quickly dropped back down. The stock remained volatile for some time before ultimately beginning a down trend to the low-$20s once again. In fiscal Q1 2020 (reported May 30, 2019), the company lowered guidance for the full year, causing a 30% sell-off in the stock. It now trades slightly above the $14.00 IPO price.

The Business

Zuora claims they're at the forefront of an economy moving towards subscription services. They have a good point. Here's Zuora's CEO Tien Tzuo discussing how even companies like Ford (F) and Caterpillar (CAT) will have to transition to subscription-based business models. Zuora lists many existing customers on their website including Zoom (ZM), Symantec (SYMC), Zillow (Z), Docusign (DOCU), General Electric (GE) and many more. They have a plethora of very large companies as customers.

This gives Zuora a big advantage in both pricing power and network effects. Zuora has pricing power as these large companies are able to afford significant subscription fees, and have large costs of switching from Zuora to competitors, as employees need retraining, customers need explanations, etc. I believe network effects come into play as well for Zuora. As more employees learn how to use the software, Zuora becomes a more valuable tool to businesses. Consider the situation where potential accountants for a business all know how to use Zuora software, but only a few know how to use competing software. Suddenly, since Zuora is the most well known, businesses that use Zuora have the greatest chance at hiring the best talent if Zuora can retain their position as the most commonly used subscription billing and accounting software. Multiple businesses using Zuora also allows Zuora to develop solutions that fit many customer's needs rather than just a few, resulting in a higher return on investment in research and development.

Zuora Billing

Zuora Billing allows users to customize their offerings and manage billing, payments and accounting all in one. The software automatically performs functions such as prorating bills, or upgrades and downgrades for different subscription tiers. It calculates taxes and sends bills out automatically. Invoices are customizable by the business to make it as complex or as simple as required. The software logs customer activities and collects and logs payments. Zuora Billing is meant to make it easy for businesses to transition payments and transactions to a subscription-based business model.

Zuora RevPro

Zuora RevPro helps businesses recognize revenue. This software is meant to help accountants automate recording complex revenue recognition scenarios. The software can be customized depending on the business and uses rule-based logic to record revenue. This is especially important for subscription-based businesses as revenue recognition rules can become complex and require dozens of considerations. Zuora's software helps businesses handle many different, complicated contracts and services at once. Zuora claims that one accountant with RevPro should be able to do what took several accountants before.

Other Products

In Zuora's all-in-one platform, Zuora Central, users get access to everything Zuora offers. This includes Billing and RevPro, as well as marketplace and more.

Source: Zuora Central Web Page

The complete package helps users launch new products, maintain pricing and service flexibility, automate billing, invoicing, and accounting, collect payments, and analyze key business metrics.

I think Zuora is on to something with their products. While they do have some competitors, from what I can find, Zuora remains #1 in the space and offers companies the most.

Good Business, But What About The Stock Price

With the recent selloff, Zuora trades at a market cap of $1.269 billion using September 4, 2019's closing price of $14.67. Management guided in their Q2 earnings call for revenue to come in for full fiscal 2020 at around $275 million. This gives the company a forward price to sales multiple of 4.6. This is on the lower side for a software company right now. As of January 2019, the average price to sales multiple in application and system software was 6.42. Since then, software companies have gone almost straight up. Just take a look at a chart of the software ETF IGV.

Revenue of $275 million still represents a respectable 17% growth in revenue annually. The company still loses money though, with management guiding for a loss between $.38 and $.40 per share.

At just 4.6 times sales there is room for significant price appreciation and multiple expansion here. The company continues to work on integrating their products and making the customer experience better and more robust for now. Investments in the business now should help pay off later. That said, I think the business remains speculative and investors should be cautious going forward. It remains to be seen whether this company can ever make a profit.

Conclusion

Zuora is an emerging company in an increasingly subscription-based economy. They have managed to attract some of the largest companies in the world as customers. That said, they're going through a transitional period right now. Revenue growth has slowed as they focus on integrating products like Billing and RevPro together. Ultimately I believe this will make Zuora's products better and will have a positive effect long term, but Wall Street likes short term profits and growth. This potentially provides an opportunity for long term investors. Personally, I'm looking to begin a small position in Zuora soon, as I do think this company has a ton of potential, but it remains risky as they continue to post losses. Zuora could be to subscription service businesses what Shopify (SHOP) is to online e-commerce businesses, but it will take time.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ZUO over 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.