Zendesk, Inc.
Zendesk, Inc. (NYSE: ZEN) operates as a software development company that offers software as a service (SaaS) solution to enable businesses and their customers to build better experiences. The company provides various product solutions, including Zendesk Support, Zendesk Chat, Zendesk Talk, Zendesk Guide, Zendesk Gather, Zendesk Explore, Zendesk Sell, and Zendesk Apps.
Why Should Investors Book Profit?
- Declining Fundamentals: ZEN’s net loss expanded to USD 223.64 million in FY21 vs. USD 218.18 million in FY20.
- Ownership Concentration Risk: As of December 31, 2021, ZEN's directors, officers, significant shareholders, and their affiliates owned ~30% of its common stock, thus gaining substantial control over its operations, which constrains the ability of other shareholders to influence corporate decisions.
- Weak Liquidity Profile: The company's current ratio at the end of FY21 is 1.56x, compared to the industry median of 1.85x. This implies relatively lackluster liquidity profile against the industry median.
- Leveraged Balance Sheet: The company is more exposed to balance sheet risk than its peers, with a Debt/Equity ratio of 2.29x as of December 31, 2021, compared to the industry norm of 0.20x. Furthermore, its long-term debt-to-total-capital ratio was 60.9%, compared to the industry average of 14.8% for the same period. These leveraged financials put the corporation at risk of huge swings due to the slightest adjustment in interest rates.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation
(Analysis by Kalkine Group)
* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation:
ZEN's share price has inclined 22.01% in the past three months and is currently leaning towards the higher band of the 52-week range of USD 87.90 to USD 155.62. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 107.68.
Considering the company's leveraged balance sheet, weak liquidity profile, declining financials, current valuation and associated risks. we recommend a "Sell" rating on the stock at the closing price of USD 124.76, down 0.33% as of April 05, 2022.
Three-Year Technical Price Chart (April 05, 2022). Source: REFINITIV, Analysis by Kalkine Group
* The reference data in this report has been partly sourced from REFINITIV.
* All forecasted figures and industry information have been taken from REFINITIV.
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