We recently came across a bullish thesis on Zuora (ZUO) on ValueInvestorsClub. In this article we will summarize the bulls’ thesis on ZUO. ZUO shares were trading at closing price of $9.27 on Apr 18 when this thesis was published. ZUO shares currently trade at a slight discount to that price.
ZUO provides leading software solutions for billing, collections, and revenue recognition. Its founder/CEO Tien Tzuo is best known for building Salesforce’s internal subscription billings platform during his time there and later for writing the business book “Subscribed” in 2018. The company primarily targets large enterprises that sell subscription services across multiple industries, with customers including Zoom, ABB, New York Times, and Cisco.
A software engineer in a coding session, demonstrating the company’s commitment to software excellence.
Zuora report results topping analysts’ expectations
Zuora reported Q1 CY2024 results topping analysts’ expectations, with revenue up 6.5% year on year to $109.8 million. The company expects next quarter’s revenue to be around $112.5 million, in line with analysts’ estimates. It made a non-GAAP profit of $0.11 per share, improving from its profit of $0.05 per share in the same quarter last year.
Zuora’s revenue growth has been unremarkable over the last three years, growing from $80.33 million in Q1 2022 to $109.8 million this quarter.
Named leader by ISG Software Research
Zuora, Inc. announced that it has been named a leader with the strongest performance by ISG Software Research (formerly Ventana Research), part of leading global technology research and advisory firm Information Services Group (ISG), in its Subscription Management Buyers Guides.
“We’ve projected that by 2027, over one-half of all enterprises will deploy a mixed revenue model that includes subscriptions and usage pricing in addition to one-time sales as enterprises make adjustments to remain competitive,” said Stephen Hurrell, Director of Research, Office of Revenue at ISG. “Zuora provides comprehensive support for numerous pricing models with flexibility and scalability to help both B2B and B2C enterprises evolve with customer demand.”
EBANX announce a partnership with Zuora
Another plus for ZUO, EBANX has announced a partnership with Zuora helping to enable payment processing in some of the fastest-growing digital markets in the world. The collaboration aims to support the global expansion of Zuora’s customers by enhancing local payment methods acceptance in 13 markets across Latin America and two markets in Africa, supporting global subscription-based and recurring revenue businesses in these regions. LatAm’s digital services market is set to grow 30% year over year by 2026, when it is expected to reach $271bn, according to Payments and Commerce Market Intelligence, (PCMI) data. In Africa, SaaS will be one of the fastest-growing verticals within the digital commerce market, accelerating at a 25% CAGR by 2026, per the Beyond Borders study, faster than the global average.
ZUO shares are currently trading at significantly discounted valuations, with a price-to-annual recurring revenue (ARR) ratio of approximately 3x and a price-to-next-twelve-months free cash flow ratio of 17x. This undervaluation can be attributed to inconsistent performance and several quarters of disappointing results. However, we believe that this time may be different, and that CEO Tony Tzuo is considering selling ZUO or taking it private.
Several factors may be driving Tzuo’s decision. ZUO’s share price has declined by over 30% since its 2018 IPO price of $14 per share. We estimate that a potential sale of ZUO could be valued at $13-15 per share, representing a 40-60% upside based on a 4.5-5.5x ARR multiple.
ZUO is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 20 hedge fund portfolios held ZUO at the end of the first quarter which was 22 in the previous quarter. While we acknowledge the potential of ZUO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as ZUO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article was originally published at Insider Monkey.