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Bull of the Day: Zendesk (ZEN)

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Zendesk , the $2.6 billion customer service software company, delivered strong Q4 results on February 8 with top and bottom line beats. Revenues came in 41% higher year-over-year at $88.6 million as ZEN added over 5,000 new customers.

The company's SaaS (software-as-a-service) platform of applications allows its customer service clients, including small and medium-sized businesses and large enterprises, to manage incoming support requests from end customers from any Internet connected computer.

You may have encountered Zendesk contact forms or chat windows on sites like Trivago, Dropbox, Groupon (GRPN - Free Report) , Vodafone (VOD - Free Report) and parts of the Expedia Affiliate Network.

And you may see the profile of Zendesk rise even higher as 2016's largest Silicon Valley IPO of the year, Twilio (TWLO - Free Report) , is also one its customers.

I last wrote about ZEN as Bull of the Day on June 22, the day before an important peer IPO that you will probably recognize. Plagiarizing myself, I include some choice sentences and ideas from that article interspersed below as I discuss the latest outlook that has Wall Street analysts raising EPS and sales estimates, thus making ZEN a Zacks #1 Rank again.

Meditate On This

Zendesk provides customer service through its platform in approximately 40 languages to customers in various industries, such as business technology, telecommunications, education/non-profit, consumer technology, media/entertainment, and retail/ecommerce.

Other customers include Redfin, the upstart real estate broker leveraging the web, FourSquare, the mobile-social-restaurant mash up, and the Wharton School which uses Zendesk's iPad app to allow their IT team to answer tickets on the go.

Zendesk is projected to hit at least $400 million in revenue this year and analysts at investment bank William Blair, after recent meetings with management, are confident the company can meet its goal of $1 billion in sales by 2020. After the quarterly report, the analysts raised their 2017 revenue projection to $418 million from $404 million.

Hello Twilio

In June I said, "I suspect that the Wall Street debut of Twilio will significantly raise the profile of Zendesk as they dwell in similar technologies like voice recognition and activation."

Here's the Twilio company description from Bloomberg.com...

Twilio provides a cloud communications platform that enables developers to build, scale, and operate communications within software applications through the cloud as a pay-as-you-go service in the United States and internationally. It offers programmable communications cloud software that enables developers to embed voice, messaging, video, and authentication capabilities into their applications through application programming interfaces (API).  

And here's a more hands-on way that Zendesk describes their customer and what they do for them...

"Twilio is a cloud-based communications company that provides its 40,000 customers—a mix of developers and non-developers—with basic building blocks for building voice and text messaging capabilities into their web apps, regardless of their level of technical experience.

"Most of Twilio’s customers begin with trial credit and then start hacking away. It is only when they have built something useful that they decide to invest more in Twilio. So it is critical that the company’s support team helps all of its customers building something as quickly and seamlessly as possible, otherwise it’s a bad reflection on how easy Twilio is to use."

Back to the Future

Offering more conjecture on the debut of Twilio, here's what else I wrote in June...

"Given this context, Twilio could IPO at less than half the value of Zendesk. Twilio said in its updated IPO prospectus last week that it plans to sell 11.5 million shares at a preliminary range of $12 to $14, placing its market capitalization as high as $1.15 billion. The company's last private investors paid $11.31 a share in 2015."

Twilio's market cap, at just over $3 billion now, is currently greater than Zendesk's. At one point last year when TWLO shares exploded to $70, it was valued at over $5 billion.

Here was some good background I shared on the young upstart as it entered the public markets with big names for customers...

According to Lauren Thomas writing on CNBC.com, "San Francisco-based Twilio has grown rapidly — 88 percent last year — by selling software that helps companies communicate with their customers using voice, video and messaging in anonymized fashion. For example, OpenTable uses Twilio to send reservation notifications, while the technology lets Nordstrom (JWN - Free Report) salespeople chat with customers who are waiting for a specific product to arrive.

"Uber is also a big client. The ride-hailing company facilitates one-on-one conversations between drivers and riders without divulging personal phone numbers. Airbnb does the same for hosts and guests."

Pricey By Any Measure

In June I noted "Zendesk trades at over 8 times this year's projected sales. The company is also not profitable and not expected to be so any time soon."

The good news now is that they hit their $300 million sales milestone for 2016, and based on this year's $400+ million projection, the stock is trading under 6.5X on a forward price-to-sales metric.

Since they added over 5,000 new customers last quarter across 3 different product/service areas, Wall Street will be watching this successful growth story very closely every quarter for continued advancement.

Finally, in June I opined "While the stock is certainly no bargain, and trades at a definite premium to many of its software-as-service and cloud peers, Zendesk is one to buy on pullbacks near $20. But it's quite possible that somebody else scoops them up all at once in a very hot industry."

You got your chance to buy this exciting and SaaSy company at $20 in December. I would still buy pullbacks under $25.

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