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Zendesk (NYSE: ZEN) is a high-growth company in the rapidly emerging market of customer interaction solutions. The company’s strong growth drivers have ensured that its revenue will grow at a CAGR of low youth over the next five years. I believe the company will gradually take market share from its competitors and establish itself as a leading customer engagement company. Long -term investors can buy company shares during pullbacks to maximize their profits.
Zendesk is a company that primarily offers its customers CRM (customer relationship management) software. The company provides support, sales, and other customer interaction solutions to its clients designed to improve customer relationships. The company built its CRM platform on public cloud technologies and open standards, with ML (machine learning) and AI (artificial intelligence) in the key position.
Growth Drivers
Zendesk Guide
The Zendesk Guide is one of the main drivers of Zendesk’s growth, which is primarily a customer self -service product. The product is built on a knowledge base that enables customer self-service and support agent productivity. As a result, the product beats the competitor’s products by a wide margin. The product works with content created and organized by the company’s customers. The product is available through a self-service website and apps used on mobile devices. Agents get this through Zendesk’s Support and Chat products. According to a report:
The self-service customer software market is worth USD 7.20 billion in 2020, and is expected to register a CAGR of 20.94% during the forecast period from 2021 to 2026.
I expect the company’s Zendesk Guide revenue to also grow at a similar rate, which will drive the company’s overall revenue growth higher. The product creates a well-stocked knowledge base for helping users. In addition, it has a feature called Answer Bot, which uses ML and AI to automatically answer customers ’questions. These are the reasons why Zendesk Guide is pleased with the increasing demand in the marketplace. The product will significantly boost the company’s revenue growth in the long run.
Zendesk Chat and Zendesk Talk
Zendesk Chat and Zendesk Talk are the significant growth drivers of the company. Zendesk Chat is a live chat and messaging software with the help of which companies can connect with customers on websites and social messaging sites, and on mobile devices. Zendesk Talk is a cloud-based call center software for more personal and productive voice and messaging services. Together, Zendesk Chat and Zendesk Talk offer a great contact center solution. According to a report:
The size of the global contact center software market is valued at USD 26.93 billion in 2021. The market is expected to grow from USD 30.74 billion in 2022 to USD 78.75 billion in 2029, showing a CAGR of 14.4% during the forecast period.
I expect Zendesk’s revenue from Zendesk Chat and Zendesk Talk to also grow at the same rate. Because these products can be configured according to the preferences of Zendesk clients, they are satisfied with the increasing demand in the marketplace. As cloud-hosted contact center solutions become indispensable for the customer support activities of the world’s leading companies, the adoption rate for Zendesk’s contact center solutions will increase. significantly in the long run, and they will further contribute to Zendesk’s total revenue and take it in an upward direction.
Competition
The customer interaction software market is highly competitive, fragmented and rapidly evolving. Zendesk’s competitors in this market are Microsoft (MSFT), Salesforce (CRM), Oracle (ORCL), ServiceNow (NOW) and Pegasystems (PEGA). Zendesk competes with these companies based on product quality, depth of product offerings, and price.
Zendesk’s main competitive advantage is that it makes its customer service software built on an open and flexible platform. In addition, the software is quick to set up and customizable, offering customers easy, cohesive and hassle-free experiences. This ensures the acquisition of new customers and significant revenue growth for the company. Another competitive advantage of the company is its use of modern architectural technology for the development of its solutions. A set of key APIs are used for solutions that enable fast modification and deep integration. The technology infrastructure used for Zendesk software ensures that customers get a highly scalable cloud-based platform with built-in high standard security measures. As a result, Zendesk’s revenue is expected to grow significantly in the long run.
Fourth Quarter 2021 Financial Results
Zendesk’s revenue for the fourth quarter of 2021 was $ 375.4 million, a year-on-year increase of 32%. Net non-GAAP revenue for the quarter reached $ 20.1 million, and net non-GAAP revenue per share was $ 0.17, up 54.55% year-over-year. The company’s guidance for revenue in the first quarter of 2022 is in the range of $ 381 million – $ 387 million, and the guidance for non -GAAP operating income is in the range of $ 20 million – 26 million.
Zendesk’s revenue grew in the fourth quarter driven by growth in its enterprise customer base, and net revenue grew due to cost control measures. The company’s continued transition to a digital-first economy has stimulated top-line and bottom-line growth. Global brands continue to choose Zendesk to improve how they interact with customers. Zendesk is under pressure from activist company JANA Partners to sell the company. The company has contacted potential buyers including software companies and private equity firms for this purpose. However, I believe Zendesk cannot be sold because such initiatives by company activists remain unsuccessful in most opportunities for high -growth and well -managed companies. Zendesk is a solid company with strong business momentum. I believe, the sale to the company will not be fulfilled due to the strong growth opportunity of the company.
In 2021, the company released a new version of its omnichannel offering, known as the Zendesk Suite. The product combines many of the company’s current solutions, such as Support, Chat, Talk, Guide, Explore and Sunshine. In the fourth quarter of 2021, Zendesk Suite saw significant adoption. In just 11 months since launching the Suite, the product has grown to 35% of the company’s annual recurring revenue, which is a $ 500 million annual business. I expect the Zendesk Suite to continue to drive the company’s total revenue in an upward direction over the next five years. The suite sees rapid adoption because it has great functionality that is easy to implement.
Appreciation
Zendesk’s competitors are Microsoft, Salesforce, Oracle, ServiceNow and Pegasystems.
| ZEN | MSFT | CRM | ORCL | NOW | PEGA | |
| Non-GAAP (FY3) P/E | 73.80x | 21.68x | 24.34x | 12.92x | 38.96x | 30.80x |
| TTM Sales Price | 10.99x | 10.99x | 6.13x | 4.89x | 15.32x | 4.66x |
| TTM Price to Cash Flow | 88.36x | 24.14x | 28.06x | 19.12x | 41.72x | 144.93x |
(Data Source: Seeking Alpha)
Zendesk is highly valued compared to its competitors. It has a balance consisting of $ 476.10 million in cash and $ 1,203.60 million in debt. The company is highly valued despite its indebtedness as its products enjoy strong market demand. In the last five years, the company’s revenue has grown at a CAGR of 33.74%. This massive revenue growth in the past and the expectation that revenue will continue to grow at a consistently higher rate has cost the company heavily. The company’s contact center and customer service products are the main drivers of its growth, which will drive the company’s revenue growth to a CAGR that is approximately youth-low over the next five years. As a result, the price of the company’s share will increase significantly in the long run. I have been strong in the company for a long time.
Assuming Zendesk’s revenue grows at a CAGR of 12%, I would know the long-term (next five years) share price of the company. The company’s next 12-month revenue is $ 1,338.60 million, and at a CAGR of 12%, the company’s revenue by mid-2027 will be $ 2,359.00 million, or $ 19.36 per share. Over the past five years, the company’s shares have traded between price in sales multiples of 6x and 18x. Over the next five years, I expect the company’s price on bulk sales to be 12x. Applying the bulk sale price of 12x Zendesk’s mid -2027 earnings per share, I get $ 232.32 as the company’s mid -2027 share price.
Risks
Zendesk’s success in terms of its ability to attract new customers and increase revenue from existing customers depends on its ability to introduce new products and enhance existing products in a consistent way. For the growth of its business, the company must engage in successful research and development activities. If the company fails to develop new products and enhance existing products through research and development, its revenue growth and profitability may be negatively affected.
To remain successful, the company must develop or acquire product and platform solutions that complement the company’s existing solutions. The company’s customers expect that its new solutions should be properly integrated with its current solutions. Expectations grew with the launch of Zendesk Suite, a product that offers multiple solutions. If the company fails to offer new solutions without adapting to existing solutions, its revenue growth and profitability may be negatively affected.
Conclusion
Zendesk solutions are selected by many brands around the world, which can be seen in the significant use of the company’s Zendesk Suite offer. I expect the company’s customer interaction solutions to continue to see increased adoption driven by superior quality compared to competitor products. Rising adoption will result in consistent revenue growth for the company. Long -term investors can buy company shares during pullbacks and hold them for at least three to five years for making significant gains.