San Francisco-based Zendesk, Inc. (ZEN) is a software development company that offers software as a service solution to businesses in the United States, Europe, the Middle East, Africa, Asia-Pacific, and worldwide. Zendesk Support, its flagship offering, is a system for monitoring, prioritizing, and resolving customer support issues across several channels. The stock has gained 33.7% in price over the past three months as the enterprise software company hit the M&A headlines following news that it had recruited an adviser to explore a potential sale.
However, its shares are down 19.8% in price over the past year and 18% over the past nine months to close yesterday's trading session at $123.08. In addition, in February, Wolfe Research downgraded the stock to peer perform, citing the company’s 2022 guidance, which points to decelerating growth and margin contraction.
Also, after failing to receive stockholder approval to issue shares of Zendesk common stock in connection with the proposed transaction, at its stockholder meeting on February 25, 2022, the company announced that it had terminated its merger plan with Milky Way Acquisition Corp. and Momentive Global Inc. (MNTV).
Here is what could shape ZEN's performance in the near term:
Jana Partners Acquisitions
Last month, Jana Partners, an activist hedge fund, accused ZEN of "hostility" toward alternative opinions only days after shareholders overwhelmingly rejected a planned acquisition of Momentive Global. The hedge fund further stated that the board should be restructured or that "in the absence of such transformation, (the firm) should be sold." Jana proposed four directors for ZEN's board earlier this month, stating that the firm needed to be rehabilitated following an unpopular effort to purchase Momentive. Zendesk shareholders rejected a proposed purchase of SurveyMonkey parent company Momentive on Friday, just days after Zendesk rejected a deal for itself.
Mixed Financials
ZEN's total revenue increased 32.4% year-over-year to $375.37 million for the fourth quarter, ended Dec. 31, 2021. Its cash and cash equivalents grew 17.4% for the year ended Dec. 31, 2021, to $476.10 million. However, its operating loss came in at $48.08 million. The company reported a $61.86 million net loss. In addition, its loss per share amounted to $0.51.
Mixed Profitability
ZEN's 79.5% trailing-12-months gross profit margin is 58% higher than the 50.3% industry average. However, its 0.58% trailing-12-months asset turnover ratio is 7.4% lower than the 0.63% industry average. Also, its negative 9.1%, 16.7%, and 6.3% respective trailing-12-months ROA, net income margin, and ROC are lower than their industry averages.
Stretched Valuation
In terms of forward non-GAAP P/E, the stock is currently trading at 156.01x, which is 752.8% higher than the 18.3% industry average. Also, its 8.55x forward EV/Sales is 179.8% higher than the 3.06x industry average. Furthermore, ZEN's 8.85x forward Price/Sales is 194.4% higher than the 3.01x industry average.
POWR Ratings Reflect Uncertainty
ZEN has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. ZEN has a C grade for Quality. The company's mixed financial and mixed profitability is consistent with the Quality grades.
Among the 157 stocks in the F-rated Software – Application industry, ZEN is ranked #77.
Beyond what I have stated above, you can view ZEN ratings for Growth, Momentum, Stability, Value, and Sentiment here.
Click here to check out our Software Industry Report for 2022
Bottom Line
ZEN's poor profitability does not justify its lofty valuation. In addition, analysts expect its EPS to decline 17.6% in the current quarter (ending March 31, 2022). Therefore, we believe investors should wait before scooping its shares.
How Does Zendesk Inc. (ZEN) Stack Up Against its Peers?
While ZEN has an overall C rating, one might want to consider its industry peers, Commvault Systems Inc. (CVLT), Rimini Street Inc. (RMNI), and Progress Software Corporation (PRGS), which have an overall A (Strong Buy) rating.
ZEN shares were trading at $122.74 per share on Wednesday morning, down $0.34 (-0.28%). Year-to-date, ZEN has gained 17.69%, versus a -11.27% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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