ZoomInfo: Not Worth The Premium Multiple With Organic Growth Slowing

Summary

• Shares of ZoomInfo jumped ~5% after reporting Q1 results which beat Wall Street's growth expectations.
• A good chunk of ZoomInfo's revenue, however, is being sourced from acquisitions.
• The company recently layered in two additional tuck-in acquisitions in April.
• Trading at a ~21x forward revenue run rate, ZoomInfo is too expensive to be considered in the current safety-oriented market.
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For some reason, ZoomInfo (NASDAQ:ZI) has been one of the few tech growth stocks to be able to retain extraordinarily expensive valuation multiples despite the steep correction that has impacted the rest of the sector. This sales-oriented software company, which is a hybrid cross between a CRM platform and a lead-generation/contacts directory tool, continues to impress investors with its heavy growth rates, but there's unfortunately not much other positive news to report on the company.

Year to date, shares of ZoomInfo have shed only ~15% of their value, roughly matching the declines of the S&P 500 and avoiding the sharp corrections seen in other high-growth tech. ZoomInfo also staged a ~6% bump after reporting Q1 results, which came in ahead of Wall Street's expectations and updated guidance favorably for the rest of the year.

Data by YCharts

Though ZoomInfo seems to be the one spot in the software sector where investors are feeling more sanguine, I continue to be very wary of this stock and remain bearish on its near-term (9-12 month) prospects.

The concerns here I have are twofold. First, ZoomInfo is already starting to see organic growth rates wane. Organic growth slipped beneath 50% y/y for the first time in Q1. Management's latest guidance for FY22 now calls for 41-42% y/y growth, of which organic growth is likely far below that.

More and more, it seems like ZoomInfo is relying on M&A to bolster its growth rates. In 2021, the company already spent a whopping $665 million to acquire Chorus.ai and RingLead. In April, the company opened its pocketbook yet again and acquired two additional companies, Comparably (a SaaS tool for employer branding and recruiting) and Dogpatch Advisors, a consultancy group focused on helping companies build out their sales capabilities.

The total cost of these two purchases was $145 million in cash. The latter acquisition worries me more - especially as it seems ZoomInfo is starting to stray away from being a true pure-play SaaS company. The continued onslaught of acquisitions (and the fact that ZoomInfo isn't making synergies/headcount reduction a top priority) likely indicates that the company will continue to struggle on GAAP profitability.

The second major concern is valuation. At current share prices near $52, ZoomInfo has a market cap of $20.97 billion. After netting off the $406.8 million of cash and $1.23 billion of debt on the company's most recent balance sheet, the company's resulting enterprise value is $21.80 billion.

Versus the company's latest FY22 revenue guidance range of $1.06-1.07 billion (41-42% y/y growth), ZoomInfo trades at an egregiously high 20.5x EV/FY22 revenue multiple - currently one of the most expensive stocks in the software sector after the recent correction.

ZoomInfo FY22 guidance update (ZoomInfo Q1 earnings deck)

The question investors have to step back and ask themselves at this juncture: especially given the slowing organic growth, will ZoomInfo be able to sustain (let alone expand) its current overpriced multiple? My assessment on ZoomInfo remains the same: don't touch this stock with a ten-foot pole.

Q1 download

Let's now go through ZoomInfo's latest Q1 results in greater detail. There's no major change or improvement in the story here: while ZoomInfo continued to exceed top-line expectations, organic growth is slowing; while adjusted operating margins are also continuing to slide under the weight of acquired companies.

ZoomInfo Q1 results (ZoomInfo Q1 earnings deck)

ZoomInfo's revenue in Q1 grew at a 58% y/y pace to $241.7 million, beating Wall Street's expectations of $228.0 million (+49% y/y) by a nine-point pace. It's worth noting, however, that organic growth was only 49% y/y, and that decelerated three points versus 52% y/y in Q4.

One plus side here: ZoomInfo seems to be continuing to ratchet up its profile with large-spending customers, signing an eight-figure deal with Google/Alphabet (GOOG) (GOOGL) in the quarter. Per CEO Henry Schuck's prepared remarks on the Q1 earnings call describing this win:

We signed an eight-figure deal with Alphabet in the quarter. Our recently released modern user provisioning now allows for anyone at Alphabet to quickly access the tremendous value of the ZoomInfo platform with automated self provisioning. And since we are publishing ZoomInfo directly on Alphabet's intranet, understanding and getting comfortable with our privacy, security, data collection and compliance practices was an important part of the sales process. Google's revenue acceleration team is also leveraging ZoomInfo's OperationsOS platform. That team is just company data and company insights to help inform the way they go to market.

By leveraging our enterprise APIs, data has matched and normalized, pulled into a data warehouse and consumed directly in their sales force instantly. A consolidated view of highly accurate data and insights streamlines their ability to provide data to their go-to-market teams while delivering success to their sellers, allowing them to sell more effectively. This type of deal structure serves as a roadmap for future enterprise expansion opportunities at other large companies."

Unfortunately, the profit story continues to look unfavorable. Adjusted operating income margins in the quarter fell to 39%, flat to Q4 and down four points versus 43% in the year-ago Q1.

ZoomInfo operating margin trends (ZoomInfo Q1 results)

In the near term, ZoomInfo's M&A activity is going to create a drag on margins. Per Cameron Hyzer's remarks on the latest two acquisitions on the Q1 earnings call:

We expect these acquisitions to contribute revenue in the low teens, millions of dollars in 2022, and create a modest drag on margins of 1 to 2 points for the remaining quarters this year. While these acquisitions are small and we’ll have only a modest impact on our financials in 2022, we expect them to be accretive to growth and operating income in 2023 and forward."

Key takeaways

It's worth noting that of the ~$400 million of cash that ZoomInfo had on its March-end balance sheet, it's spending $145 million in April to acquire Dogpatch Advisors and Comparably. ZoomInfo's latest M&A-fueled growth binge has limits, and that limit is ZoomInfo's balance sheet, which is already saddled with sizable debt. I'm not keen to pay a >20x forward revenue multiple to bet on this stock - I'd steer clear here.

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.

Comments

[Joseph Webster]

I went long ZI this week. Here's my take:

- Companies that have a history of surpassing ER estimates deserve a premium. ZI has beat ER estimates on both top and bottom lines for at least a year, maybe longer. There is a good chance that ZI will continue to grow at a faster rate than projections.
- One of the biggest weaknesses in the tech sector is reaching GAAP profitability. ZI is profitable on a GAAP basis and even with a possible deterioration in margins, should be able to expand the bottom line in the future. Also, the FWD PE ratio is 62, which is not unreasonable at all for a company growing at this rate.
- While I recognize that other companies in the sector have fallen harder in this market, that could be interpreted a couple different ways. Yes, it is not as cheap as some other companies, but companies that retain relative strength in these markets often outperform those that have fallen harder

[rt94103]

Long. While a year old, I like Bert's take...

seekingalpha.com/...