New Trade for August 4th 2020

We’re back for another day of trading.  Futures are down this morning after the major U.S. indices closed higher yesterday.  The Nasdaq closed at all time highs and the S&P 500 closed at its highest level since February 21, 2020.  

Tech stocks have been on a tear as the work from home trend continues.  Today we are looking at one stock who took a hit after disappointing earnings and bleak guidance.  But looking at the fundamentals and potential for growth, the ~10% loss could offer a great entry point for this best-in-breed brand name in customer service.

Customer support has changed rapidly over the past decade.  One of the increasingly common ways to reach a company is through a Zendesk (ZEN) widget.  Even those who work outside of customer service or software will recognize the Zendesk name as its technology is gaining rapidly in adoption.  Zendesk outshines its competition in the field.  The most trusted IT industry observer, Gartner, renewed its “leader” designation for Zendesk for the fifth year in a row.  This speaks volumes on ZEN’s reputation.  

Among growth software stocks, ZEN’s valuation isn’ t tremendously high.  At current share prices in the low $90’s, Zendesk has a $10.4 billion market cap and a $10.2 billion enterprise value, representing an 8.1x EV/FY21 revenue multiple versus Wall Street’s consensus $1.26 billion (+25% year over year) revenue target for the next fiscal year, whereas other mid-20’s growers tend to trade above a double-digit multiple.  

ZEN’s share price could continue to sink from here in the near term as investors continue to process the bleak outlook for Q3, but ZEN should provide solid long-term upside as the company establishes itself even further as the industry leader.