Zuora: Incredible Bargain

May 27, 2022 3:26 AM ETZuora, Inc. (ZUO)11 Comments7 Likes


  • Shares of Zuora rebounded modestly after posting strong Q1 results, but remain down nearly 50% year to date.
  • Revenue growth accelerated to 16% y/y in Q1.
  • In addition, the company expects to grow ARR north of 20% y/y in the current year.
  • Zuora still remains a deep value stock trading at just 2.5x forward revenue.
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Zuora headquarters in Silicon Valley

Sundry Photography/iStock Editorial via Getty Images

It's time for investors to take on some hopeful sentiment and reposition their portfolios for a rebound. While market movements this year have been excruciatingly painful, especially in the tech sector, these deep divots often represent the best buying opportunities.

Zuora (NYSE:ZUO), in particular, continues to stand out to me as a stock with unparalleled rebound potential. Not only are the company's fundamentals getting back on track (Zuora just released Q1 results that showed acceleration in revenue growth, not to mention positive free cash flow), but Zuora continues to trade at deeply discounted multiples after a nearly 50% correction in its stock year to date.

Data by YCharts

I retain my bullish outlook on Zuora, especially as the stock has slid under $10. For investors who are unfamiliar with this name, Zuora operates a subscription ERP platform that specifically serves the needs of other subscription businesses, giving it a defensible niche in a rather competitive area of enterprise software. This niche aspect, in my view, also lends itself nicely to Zuora becoming a potential acquisition play for a larger software portfolio.

For me, here are the chief reasons to be bullish on Zuora:

  • Subscription-based business models are becoming dominant. Given the fact that more and more businesses are adopting this type of model, Zuora's base of potential customers has widened significantly. Zuora's uniqueness in this regard is also important to point out: companies can choose a regular ERP, but Zuora's subscription-focused solutions help to address common pain points.
  • Innovation track record is strong; the product portfolio is expanding. There's virtually no other company that markets itself as a purpose-built platform for subscription companies. Zuora has also done a good job at fleshing out its portfolio of solutions, ranging from revenue management to billing tools to CPQ (configure, price and quote) applications.
  • Zuora grows along with its customers. As Zuora's clients' subscriber bases grow, so does Zuora's opportunity to monetize and grow alongside its customers. The company has noted that upsells have hit a "record pace", and highlighted several key milestones like GoPro's (GPRO) subscription-based storage and insurance program (a key feature of the company's planned turnaround) hitting 1 million subscribers.
  • Offloading services work to partners. As Zuora has scaled, it has also been able to ramp up its third-party vendors and resellers to take on more of the unprofitable services/onboarding work that typically acts as a drag on software-company margins. Zuora's mix of subscription versus services revenue has grown over the past several quarters, helping boost gross margins and illustrating where Zuora would prefer to be at scale.
  • Acquisition possibility. While I never like to base any investment decision based on high hopes that the stock will get acquired, Zuora checks off a lot of boxes for being acquired: it's small with just a ~$2 billion market cap; it offers a very unique product that many larger software companies may want to get their hands on, especially during times when organic growth is fading; and it's FCF positive.

Valuation, of course, remains Zuora's principal appeal. At current share prices just shy of $10, Zuora trades at a market cap of just $1.27 billion. After we net off the $452.6 million of cash and $205.1 million of debt on Zuora's most recent balance sheet, the company's resulting enterprise value is $1.02 billion.

Zuora Q1 earnings release

Zuora Q1 earnings release (Zuora FY23 guidance)

Meanwhile, for the current fiscal year FY23, Zuora has guided to $402-$406 million in revenue, representing 16-17% y/y growth (an acceleration, by the way, over the 14% y/y growth that Zuora notched in FY22). This puts Zuora's valuation at just 2.5x EV/FY23 revenue, making it one of the cheapest stocks in the software sector (and definitely a level at which there are certain to be potential acquirers window-shopping).

Take advantage of Zuora's ultra-low valuation to buy. Especially at a time when the company's fundamentals are kicking back into high gear, Zuora is the perfect stock to own in a broad market rebound.

Q1 download

Let's now review Zuora's latest fiscal Q1 results in greater detail. The Q1 earnings summary is shown below:

Zuora Q1 earnings release

Zuora Q1 earnings release (Zuora Q1 results)

Zuora's revenue in Q1 grew at a 16% y/y pace to $93.2 million, beating Wall Street's expectations of $92.2 million (+15% y/y) as well as accelerating two points over Q4's 14% y/y growth pace.

Other metrics worth highlighting: Zuora continues to aggressively build up its ARR base. ARR hit $326.3 million as of the end of Q1, growing 20% y/y. The company also hit a 110% net revenue retention rate in the quarter, representing a 10% average upsell and much higher than 103% in the year-ago Q1.

Here's some helpful anecdotal commentary from CEO Tien Tzuo on the company's go-to-market momentum, made during his prepared remarks on the Q1 earnings call:

Now we are pleased with the progress we've made on the product front, but we are equally proud of how our go-to-market strategy is also delivering. As we said, we believe the sweet spot in the market for us lies with large enterprises, and we see this playing out in our deals. In Q1, we closed 6 deals with ACV of $500,000 or more; and two, with ACV of $1 million or more.

Year-over-year, our average sales price for new logos has more than doubled. Now these enterprises are turning to Zuora because of our technology, but it's also because of our unique expertise. The depth of our customer base is truly remarkable. And a few years ago, we created our subscribed institute to tap into the collective intelligence of this unique asset [...] It's also a key factor in attracting more system integration partners to our ecosystem, and this quarter was no exception.

In Q1, we saw our partner strategy continue to deliver for our business. Our partners continue to influence over 70% of all new business transactions. In Q1, and our partner source pipeline continues to grow. In Q1, we reached a big milestone in our partner certification efforts. We now have more than 450 globally certified consultants with our SI partners. This represents over 3x growth compared to this time last year."

Profitability also remained quite impressive. Pro forma gross margins rose three points to 67%, driven by a higher subscription revenue mix (especially as more partners take on the lower-margin implementation work). Pro forma operating margins, likewise, also rose three points to breakeven, versus -3% in the year-ago quarter.

Key takeaways

Re-accelerating growth, a well-placed product niche, and strong value - there's a lot to like about Zuora, especially with the stock currently underwater and sitting below $10. Stay long here and use the dip as a buying opportunity.

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This article was written by

Gary Alexander profile picture
Curated research on high-performing tech; winning trades closed monthly
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.

Disclosure: I/we have a beneficial long position in the shares of ZUO either through stock ownership, options, or other derivatives. 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.

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