Zendesk: Big Buyers Bet on the Cloud

04/11/2016 7:00 am EST

Focus: STOCKS

Rob DeFrancesco

Founder, Tech-Stock Prospector

The role of customer service is changing and our latest small cap buy is leading the charge to improve the experience for both clients and their customers, explains Rob DeFrancesco, editor of Tech Stock Prospector.

Zendesk (ZEN) is a provider of a cloud-based customer service platform. The customer service & contact center software market is estimated to total around $10 billion, according to research firm IDC.

While Zendesk today has a tiny share (revenue in 2014 totaled $127 million), it’s quickly expanding and has become a favorite of many fast-growing companies (including Uber, Airbnb, Dropbox, Box and OpenTable).

The company delivered December 4th quarter revenue that easily beat expectations. The cloud-based software platform used by customer service departments had revenue of $62.6 million, up 63% year-over-year.

In the quarter, the company added more than 5,000 new accounts. Zendesk now has 69,000 customers, a third higher than the year-ago level.

The company also offered upbeat guidance for 2016. With a market cap of $1.7 billion, shares trade at six times the 2016 revenue guidance midpoint of $295 million.

Taking into consideration cash & investments on the balance sheet of $267 million — and no debt — the forward revenue multiple drops to 5.1, an attractive valuation relative to the expected top-line growth rates.

In the last quarter some savvy institutional investors either opened a new Zendesk position or added to their holdings.

Among the big buyers, Columbus Circle Investors initiated a position of 1 million shares.

Lord Abbett increased its position by 89% to 2.06 million shares. Wellington Management and Waddell & Reed initiated positions of 974,000 and 566,000 shares, respectively.

While the firm's fundamentals continue to look promising, the shares are still off 25% year-to-date. 

For long-term investors, the stock's weakness presents an accumulation opportunity. The stock has been added to our Small-Cap Model Portfolio.

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By Rob DeFrancesco, Editor of Tech Stock Prospector

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