Zuora: A Company With Potential, Issues, And A Takeover Ready Valuation

Summary

• ZUO’s revenue growth has been strong during the last decade (+22%), although there appears to be a slowdown to low single-digits in recent peers.
• Despite consistently upselling its existing customer base, we feel ZUO is struggling with competitive pressures, restricting its ability to acquire customers at a considerable rate.
• This has restricted its ability to progress margins to the level expected by investors. We believe ZUO can reach an adj. EBITDA-M of ~15%.
• ZUO’s financial performance is underwhelming relative to its peers, although the business should be able to close the gap over time. It is critical that it maintain its upselling momentum.
• ZUO’s valuation is heavily depressed, with a >150% discount to its peers. We believe this, alongside its NTM FCF yield of 5%, makes it an attractive takeover target, protecting downside risk.

Maskot

Investment thesis

Our current investment thesis is:

• ZUO is a market leader, ensuring it should progressively grow over time with limited churn, even if this lags behind its peers. This should drive incremental margin improvement through operating cost leverage, increasing its attractiveness.

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.