Zendesk released their earnings report for Q1 2020 on April 30, 2020. Results were mixed – they beat Q1 estimates, but lowered revenue projections for Q2 due to COVID-19 impact on customers. The market reacted the next day by pushing ZEN stock down 5.6%, although some of that drop has recovered since then. Most analysts lowered their price targets. Zendesk leadership also retracted prior FY 2020 guidance, until they have more clarity around the duration of the COVID-19 economic downturn. Let’s take a deeper look at the results and draw some conclusions for the investment thesis.
Over the last couple of months, I have noticed several prominent software companies announcing new platform offerings. This goes beyond a marketing tactic, as most are backing the move with substantial new capabilities and tooling to add “programmability”. These extensions are meant to appeal to solution builders, in addition to their existing product users. While the companies will still offer packaged products, they are opening up their underlying software services for outside developers to build their own custom applications. The rationalization is an expectation that this will drive incremental revenue from usage fees, as developers launch brand new businesses or internal teams at enterprises tackle adjacent use cases. Also, some leading SaaS companies haven’t rolled out full platform offerings, but might benefit from it. In this post, I will examine what makes for a productive platform play, several recent examples of this trend and how it might apply to other point solution providers. The platform potential of a software company is an important consideration for investors. If executed successfully, it can substantially magnify the long term growth opportunity for a company’s stock.
After releasing strong Q4 2019 earnings results in early February, Zendesk (ZEN) promised investors some exciting product announcements at their annual customer event, Zendesk Relate, scheduled for the first week of March. Unfortunately, due to concerns with COVID-19, Zendesk cancelled the in-person event. However, they still made a number of product announcements and held a virtual analyst event on March 4. While the cancellation of Relate and the evolving COVID-19 situation will impact Zendesk’s business in 2020, their strong product development motion and new offerings will expand their leadership in customer service and support their foray into customer relationship management.
Zendesk released earnings results for Q4 2019 on February 6, 2020. Reaction to these results were generally positive. The market bid ZEN stock up slightly the next day, closing up about 0.3%. Analysts were uniform in their reaction, with 6 out of 6 analysts raising their price target and reiterating a buy rating. Projections for 2020 were on target, with room to outperform. Let’s take a deeper look at the results.
Microsoft reported FY20 Q2 earnings after the market close on January 29th. I won’t dig into Microsoft’s performance overall, as it is covered thoroughly by other analysts. However, within the earnings release and subsequent analyst call, there were some implications for smaller, niche software companies that may be useful for investors to consider.
Date of Recommendation: Jan 28, 2020
Closing Stock Price: $85.87
Zendesk (ZEN) stock should be considered for long term investment. I expect the price of Zendesk’s stock to grow significantly over the next 5 years. This is based on my characteristics for a successful software stack company. Growth will be driven by their solid position in a large addressable market, with multiple expansion opportunities. Their product development cadence has accelerated, with several exciting new launches in the last two years. Zendesk is viewed as a leader in customer service and already supports many large-scale internet-first operations. They have a reliably growing revenue base and have demonstrated basic profitability. The leadership team is strong, led by a long-time founder and CEO. I expect the stock price to more than double and exceed $220 within the next 5 years.
