ZoomInfo Stock: Fast Growth, Highly Profitable, And Cheaply Priced

Summary

• ZoomInfo is a high-quality sales, marketing, and recruiting platform. It holds millions of clean data points on companies and clients.
• Unlike countless other SaaS businesses, this company is already highly GAAP profitable, with operating margins of 24% as of Q2 2021.
• Even though the stock has rallied this year, it's still only priced at 17x next year's revenues.
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Investment Thesis

ZoomInfo (NASDAQ:ZI) is a sales representative platform that's rapidly becoming the go-to selling platform for users that want very high-quality accurate data on prospective customers.

Not only does ZoomInfo's net retention metrics remain appetizing at 108%, but it's already highly GAAP profitable at 24% operating margins.

Indeed, by any reasonable metric, this stock is cheaply valued. For comparison with other stocks, this is priced at 17x 2022 year's revenues, but this is far from the whole story.

ZoomInfo's Revenue Growth Rates Remain Strong

Source: author's calculations

The graph above speaks for itself. ZoomInfo is growing at more than 45% CAGR in 2021 and its guidance for the rest of the year remains highly enticing.

The big question is what rate will ZoomInfo grow at in 2022? Presently, analysts following the stock are expecting that ZoomInfo's growth profile will go from growing this year at approximately 47% to just 31% next year. With this in mind, I declare that analysts are been too gloomy here. That there's a lot more under the hood to be compelled towards ZoomInfo.

ZoomInfo's Prospects, What to Think About?

ZoomInfo sells subscriptions to a cloud-based business intelligence platform used by corporate sales and marketing teams. Think of LinkedIn (MSFT) but with a focus on sales, marketing, and recruiting professionals.

ZoomInfo provides intelligence and analytics to sales and marketing professionals. It aims to shorten sales cycles and increase win rates for customers.

ZoomInfo not only holds accurate contact information on companies and clients but also insights into planned investments and technologies used by companies. It has become an indispensable platform to get granular department data, including funding information and revenue profiles of subsidiaries.

In essence, ZoomInfo takes personal data from millions of sources, including first-party and third-party platforms, with the business value being that ZoomInfo guarantees 95% accurate data entries, by using its own data scientists to clean its business-to-business data entries.

However, the most compelling aspect here is its profit margins.

ZI's Profitability Profile Remains Impressive

As you can see below, ZoomInfo's financial position is robust:

(Source)

If we factor in its cash and equivalents, ZoomInfo carries a $350 million net debt position. While this is some debt, it's not too much. And more manageable we consider that its net leverage ratio stands at 1.3x. As a reminder, anything less than 3x net leverage is considered prudent. And of course, the less leveraged, the better.

Moving on, the most bullish consideration for investors is that this company is already GAAP profitable. Starting with Q4 2020, we saw GAAP operating income margins of 21%, then in Q1 2021 GAAP income margins dipped to 18%, and for Q2 2021 it improved to 24%.

Looking further ahead to its full-year 2021, on a non-GAAP metric, operating income margins are expected at approximately 43%.

In short, we can see that ZoomInfo is remarkably profitable, despite supporting very strong growth rates. In fact, its latest results note that it has a rule of 40 of 98%.

Remember, most of the best companies in SaaS work hard to reach high 40s% to 50s%. For example, one of the hottest stocks in the market, CrowdStrike (CRWD) has a rule of 40 of 80% and investors are willing to pay 29x next year's revenues for that stock.

Now, let's do some assumptions as to ZoomInfo's next year's free cash flow potential. We know that ZoomInfo's free cash flow is expected to reach $305 million in 2021, increasing by 25% y/y relative to 2020.

One may contend that a 25% increase on the back of growing its top-line by more than 30% this year isn't that alluring. And admittedly, I can see that side of the argument. But one may remark that ZoomInfo is still far from maximizing free cash flow.

Finally, before we dig into its valuation, keep in mind that ZoomInfo's management still holds 4.1% of the Class A shares, as well as the majority of the voting shares alongside other investment funds. That being said, the two founders did hold 17% of the stock at the time of the IPO, so insiders have sold a substantial portion of their holdings.

Valuation - Why ZI Stock is Worthwhile

As noted earlier, there are some question marks as to what ZoomInfo's growth rates will be in 2022. But if take analysts' consensus for 30% CAGR next year, this puts the stock priced at 17x next year's revenues.

What's more, not only is ZoomInfo already highly profitable but its rule of 40 puts it amongst the best SaaS companies.

The main negative aspect facing this company is that privacy concerns continue to overhang the stock.

Not only in the US with the FTC and California Consumer Privacy Act (“CCPA”), but in the UK with GDPR too. Any changes in the rules pertaining to holding and selling personal information could have dramatic effects on the underlying profitability of the company.

What's more, any change in rulings may not be uniform across regions, but this could still leave the company operating in a non-compliant manner, which would meaningfully impact its growth profile and multiple that investors would be willing to pay for the stock.

The Bottom Line

Data by YCharts

Arguably, the biggest detraction about the stock is that it appears expensive. That being said, I don't know of many profitable SaaS names that are expected to grow at more than 30% in 2022 and are still being priced at less than 20x of 2022 revenues

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in ZI 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.