ZoomInfo Continues To Transform With Its Improved GTM Solution

Summary

• ZI's management anticipates a stronger third quarter, with increased net retention and a growing customer base.
• Continues its enhancements by integrating well-known services such as Microsoft Dynamics 365 and adding Chorus in their product portfolio, which generates a wow factor among its customers.
• Generated a solid revenue growth of 57 percent, an all-time high P/E ratio of 260.78x and ROE of 8.81 percent.
• Making ZI well positioned to benefit from a growing $70 billion opportunity.

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Investment Thesis

ZoomInfo Technologies Inc. (NASDAQ: NASDAQ:ZI) is an underrated stock, despite its strong revenue growth and strong P/E ratio. As of this writing, ZI is attempting to set another all-time high as opportunities continue to strengthen for the company. The new ZI should not be valued in the same way as it was during its initial public offering, as it has rapidly evolved since and is well positioned to capitalize on a $70 billion dollar opportunity. ZI's strong financial performance, high P/E multiple, and bullish market outlook all contribute to the company establishing a strong moat in the market.

Bigger ZI

Image Source: Investor Presentation

Following its initial public offering, ZI continued to improve its services in order to meet the needs of its customers. From a $24 billion TAM target, the opportunity has since grown to $70 billion. By enabling organic and inorganic growth to coexist efficiently, ZI is well positioned to accomplish this goal.

ZI Isn't Quite Close To Achieving $70B Goal

Image Source: Investors Presentation

ZoomInfo is not yet mature and its high valuation implies that it has significant upside potential in the future. This is one of the reasons why I believe ZI deserves an upgrade from analysts. The company is constantly integrating new technology into their existing products, one of which is the well-known Microsoft Dynamics 365, which adds value for their customers. Following that, ZI targets small to large-sized businesses by providing well-tailored services. Another successful integration is their investment in Salesforce, which has expanded its market reach globally, generating 30% of ZI's revenue from foreign countries. Additionally, its recent successful acquisition of Chorus compelled management to raise its operating income forecast from $291 million to $295 million. Chorus significantly contributes to ZI's customer acquisition and higher retention rate by providing a superior go-to-market solution. It has been successful with customers providing positive feedback, and management has stated that they intend to integrate it into ZoomInfo by the end of H1 2022.

Strong Financial Performance and High Valuation

ZI's third quarter continued its strong revenue growth trend, generating $147 million. This is 57 percent more than the same quarter last year and a 14 percent increase on a quarter-over-quarter basis, consistently outperforming its past performances.

Source: Prepared by the Author, Data source: SeekingAlpha

A strong top line revenue translates into a healthy gross profit. ZI's third quarter gross profit was $143.7 million, up 74% from last year's Q3 and up 9% from Q2. As a result, the gross margin reached an all-time high of 82.59 percent, strengthening it with an all-time high return on equity of 8.81 percent. One risk associated with owning ZI at the moment is their excessive valuation in terms of both P/E and EV/EBITDA multiples in comparison to the sector median. That leads to a strong F rating from seeking alpha. Nonetheless, management continues to upgrade ZI's outlook for 2021, increasing it by 5% from $676 million to $707 million. ZI is fairly valued at 62.5 at 83.81x next year's earnings if the analyst's high estimate is used - which is highly achievable with today's growth figures.

Price Action: Retesting All-Time High, RSI Bearish Divergence, Pullback

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Bearish divergence on the RSI with high valuations and selling pressure from a bearish catalyst in the form of a $20 million dollar secondary offering by ZI's stockholder. This puts ZI under pressure and likely closes its recent $55ish gap. Secondary offering by a specific stockholder of ZI will not benefit the company as a corporation, as the entire transaction is between the buyer and the specific stockholder. This will not result in dilution, but will instill fear, and it will appear as though ZI is already excessively valued. A healthy correction is expected, safeguarding bullish price action at the third key level.

Conclusion

ZI is currently trading at 260.78x times earnings, it appears to be overvalued when compared to the sector's median of 21.72x. Comparing ZI's forward P/E ratio of 118.84x, on the other hand, tells a different story to investors. Similarly, ZI is trading at a triple-digit EV/EBITDA multiple of 124.58x, but appears to be undervalued in comparison to its forward EV/EBITDA multiple of 73.46x. Investors should not avoid these types of stocks simply because they appear to be overvalued. On one of my past investment thesis: On The Verge Of Setting Another All-Time High, I explained how elevated valuations continue to drive prices higher. Both Pool Corporation (NASDAQ:POOL) and ZI illustrate the same point: a high valuation does not always imply a bubble.

Catalysts such as stock repurchases will help bring the P/E ratio back to earth, while analyst upgrades will help alleviate investor concerns about ZI's valuation. Always buy at your comfort price and don't chase price. Apart from its high valuation, another significant risk is the constant dumping of shares of their lead manager at an average price of $53 even before the announcement of its secondary offering. This is unusual given the frequency with which names appear on various dates. Below is the list of Insider trading transactions:

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A stock with high valuation backed up with strong revenue growth is worth adding to your watchlist.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.