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Bull of the Day: Zendesk (ZEN)

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Zendesk (ZEN - Free Report) is a $2.5 billion software-as-service company that provides a customer service platform to small and medium-sized businesses and large enterprises.

The company offers applications that allow clients 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 the largest Silicon Valley IPO of the year, Twilio (TWLO), is also one its customers.

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 $300 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.

Hello Twilio

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

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."

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.

According to Lauren Thomas writing on, "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

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.

This year's projected earnings are -$1.20 which represents a 27.66% loss vs. last year. And 2017 profit estimates call for -$1.27.

Why is the stock a Zacks #1 Rank then? Because it's the direction that recent estimate revisions are moving that count. And that 2016 estimate of -$1.20 is up from -$1.29, while the 2017 number is up from -$1.40.

And investors have rewarded the company for this improved outlook by moving shares 20% higher since their May 3 earnings report. It also helped that the company hosted an analyst day in mid-May where management detailed their long-term targets, including gross margins of 75% to 77% by 2020 and non-GAAP operating margin of 8% to 12% by 2020.

William Blair analysts had this to say after the analyst day...

"We believe the company’s transition to modular-product offerings will allow it to attract a wider customer base and increase its average selling price across both smaller customers and enterprise organizations. Further, we believe the market for customer services remains large and underpenetrated. In our opinion, Zendesk is well positioned in the market as more organizations are now competing on customer service -- driving continued adoption for the company’s products."

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.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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