Zendesk Stock Down 20% Today – Time to Buy ZEN Stock?

The price of Zendesk stock is dropping nearly 20% this morning in pre-market stock trading action following news that the company will be acquiring Momentive  – the parent company of the well-known SurveyMonkey service – for around $4 billion while at the same time the company announced its financial results covering the third quarter of the year.

For the three months ended on 30 September, the customer support software-as-a-service (SaaS) company reported total revenues of $347 million resulting in a 32.4% jump compared to the same period a year ago. This figure slightly exceeded Wall Street’s estimates for the quarter by $11.6 million.

The percentage of customers producing over $250,000 in annual recurring revenue (ARR) for the business increased to 37% – up from the 30% the firm reported during the same period a year ago – while Zendesk now has more than 100 accounts producing over $1 million in revenue for the business each.

Non-GAAP gross profit margins improved 300 basis points for the firm on a year-on-year basis upon landing at 82% while the firm’s non-GAAP operating margins shrunk 200 basis points to 8% as a result of a larger operating loss of $38.9 million compared to the negative $28.3 million figure reported a year ago.

Finally, the firm’s adjusted net income stood flat at $21.7 million while adjusted earnings per share landed at $0.17. This figure was the same reported by Zendesk a year ago while it also hit Wall Street’s consensus estimate for the quarter.

On the other hand, the acquisition of SurveyMonkey’s parent company would involve the issuance of approximately 33.2 million shares of Zendesk resulting in an estimated valuation of $4 billion for the business. As a result of the transaction, Zendesk will own 78% of Momentive and the deal is expected to contribute a good deal to ramp up the firm’s top-line results to its target of $3.5 billion for 2024.

Can today’s drop accelerate the downtrend that Zendesk stock has been experiencing lately? In this article, I’ll attempt to answer that question by analyzing the price action and fundamentals of this software company.

68% of all retail investor accounts lose money when trading CFDs with this provider.

Zendesk Stock – Technical Analysis

The price of Zendesk stock has been steadily declining since its 8 February all-time high of around $163 per share. As a result, the stock is reporting losses of nearly 17% for the year while today’s sharp pre-market decline will drastically accelerate this negative performance.

The steady increase in the company’s net losses despite the continuous advance of its top-line results is one of the factors that is probably encouraging market participants to dump ZEN stock.

As a result, the price remains below its short-term moving averages while momentum oscillators show a sharp trend reversal that started on 25 October. Thus far, this would be the fifth consecutive losing day for ZEN stock if today’s pre-market drop materializes during the live session.

This decline is also breaking the downward price channel shown in the chart and this indicates an acceleration in the downtrend for the software company.

The highly dilutive nature of this announced acquisition along with weak technical readings are reinforcing a bearish outlook for Zendesk stock with the $93 level possibly serving as the next area of support to watch.

Zendesk Stock – Fundamental Analysis

Zendesk has been losing money in the past 5 years at least despite its top-line results moving above the $1 billion mark. Even though the company has managed to keep its negative net margins at around 21% in the past couple of years, this situation is particularly worrying as there is no path to profitability in sight.

Meanwhile, the company will be expanding its share count by nearly 28% to settle the acquisition of Momentive. Even though the premium paid for the company relative to its market capitalization as of yesterday is relatively low at around 10%, the valuation assigned to the firm is particularly stretched based on its revenue-generation capacity.

Last year, Momentive produced $375.6 million in sales and Wall Street’s estimates see the firm producing around $446 million in top-line results this year. Zendesk is paying nearly 9 times that figure for a business that is producing net losses of approximately $100 million per year.

From a purely financial standpoint, the net result of taking over Momentive’s business is not really attractive and may lead to even higher losses for the firm in the future.

At its current estimated enterprise value of $14 billion, Zendesk is trading at 10.5x its forecasted sales for 2021. This multiple is slightly lower than the average assigned to SaaS companies and it reflects the poor fundamentals of the business.

Considering its elevated negative net profit margins, it is my belief that Zendesk is an overvalued company and the dilutive nature of this acquisition and its financial impact favor a bearish outlook for its stock price.

Buy Stocks at eToro with 0% Commission Now!