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Zendesk: Strong Long-Term Buy Given Growth Trajectory

Mar. 04, 2021 8:41 AM ETZendesk, Inc. (ZEN)4 Comments


  • Zendesk recently reported Q4 earnings with revenue growing 23%, though EPS coming in a little below consensus expectations.
  • 2021 guidance was provided with revenue expected to grow 24-27% and operating margins expanding a bit.
  • Management talked about revenue more than tripling over the next five years, which equates to a revenue growth CAGR of around 25%.
  • Current valuation sits at ~13.6x forward revenue and the long-term growth prospects should continue to yield a premium valuation.

Zendesk (NYSE:ZEN) reported another strong quarter with Q4 revenue growth of 23% coming in well above consensus expectations.

Management also provided 2021 guidance, which included revenue growth of 24-27% and an operating margin of ~7.5% at the midpoint. While guidance is potentially a little conservative, this still represents another strong year of growth for the company. In addition, management noted they can more than triple revenue over the next five years, which would equate to a revenue growth CAGR of around 25%.

I believe this is highly likely to occur given the company continued to grow above 20% even during a global pandemic which shut down many countries and significantly slowed business spend. In a more normalized environment, I believe the company will achieve a minimum of 20%+ revenue growth, with potential to accelerate even higher than 25% CAGR.

Though this seems like a lofty revenue expectation, I believe this is achievable. 2021 revenue guidance still includes some impact from the global pandemic as economies continue to recover. In addition, the company's remaining performance obligations remain healthy with growth of 44% during Q4, including 65% growth in long-term RPO.

While the stock has traded down a little bit since reporting earnings, ZEN remains up nearly 10% so far in 2021. I think the minimal movement in the stock since earnings make sense as Q4 EPS missed consensus expectations. In addition, while 2021 revenue guidance was pretty strong, operating margin guidance only implies ~50 basis points of expansion.

The lower-than-expected operating margin expansion should be given a pass as the company continues to focus on very strong revenue growth over the next few years. If the company is able to more than triple their revenue while growing at a 25% CAGR, I believe investors will continue to focus on revenue rather

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.

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Comments (4)

@The Software Side of Life Tough year for Zendesk. Do you see any light at the end of the tunnel.

With Q3 earnings in the rear view, seems like most of the high-growth names are selling off hard. A multiple re-rating (lower) would be bad for those of us with a sleeve allocated to the names.
The Software Side of Life

SA is a excellent platform! I did not realize that this platform is very intellectual platform! If you bring your garbage here, folks here do the following:

1) They do not even waste time commenting period.
2) They trash you to pieces in their comments period.

My 2 cents.
The Software Side of Life,
This article is a classical example of a poor article. You read through the article and ask oneself - what does ZEN do? I would strongly recommend to read other SA articles that are well written. This will improve your writing skills. Writing a good article is far more than simply going into quarterly reports - copying and pasting tables and graphs from there. Thanks
@kalu0003 Great point!

When an investor reads an article/analysis he/she needs to see answers to these questions:

1. What does the company do?
2. How much do I make in 1-10 years if I invest now $100?
3. EPS evolution and forecast?
4. FCF evolution and forecast?
5. Debt?
6. Valuation?
7. Competition?
8. Market and customers?
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

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