ZoomInfo Technologies ZI 0.00%↑ is one of the fallen software stocks that has yet to recover from the tech crash of 2022. The US-based SaaS company is a leading provider of B2B information and business intelligence for sales, marketing and recruitment teams. Please do not confuse this company with the video conferencing provider Zoom Video Communications ZM 0.00%↑, the two companies have nothing to do with each other.
Despite the intact negative trend, I have built up an anti-cyclical position in ZoomInfo shares in several tranches over the past 9 months for my investable model portfolio.
Here is the background to this investment case:
History of ZoomInfo
ZoomInfo was originally founded in 2007 under the name DiscoverOrg by current CEO Henry Schuck and Kirk Brown. The founders set out to create a data platform that would provide sales and marketing teams with high quality, timely and comprehensive business information.
As well as growing strongly organically, the company has acquired several smaller competitors and complementary technologies. In 2016, the company received funding from private equity firm TA Associates, which was used for further aggressive expansion and technology development.
A key milestone was the acquisition of ZoomInfo in February 2019, which enabled DiscoverOrg to significantly expand its business information offering and reach a broader customer base. The acquisition also resulted in a name change: DiscoverOrg became ZoomInfo Technologies Inc.
ZoomInfo went public in June 2020. The Nasdaq IPO was one of the most successful of the year; despite the economic uncertainty caused by the COVID-19 pandemic, ZoomInfo shares, issued at 21 USD, rose more than 60% to 34 USD on the first day of trading.
After a two-year slump, the share price is now around 13 USD, well below the issue price. This means that the Enterprise Value of the company (EV explained here) is now less than 6 billion USD.
This is despite revenues tripling to 1.24 billion USD between 2019 and 2023 and free cash flow multiplying to over 400 million USD per annum.
So what's wrong with ZoomInfo shares?
The ZoomInfo Business
ZoomInfo operates on a subscription model, with more than 35,000 customers paying primarily on a per-user basis, typically annually in advance, for access to ZoomInfo's extensive database and various SaaS tools. As a result, the majority of ZoomInfo's revenue comes from recurring subscription fees, a revenue stream that is typically highly valued by investors.
The ZoomInfo platform is segmented into various packages:
1. Sales OS
ZoomInfo offers comprehensive industry data that can be used to develop a market entry or expansion strategy. The proprietary data platform provides highly specialized information for sales optimization and contains 104 million companies and 321 million contacts. ZoomInfo enables sales teams to precisely segment potential customers in order to develop effective sales strategies. This is because up-to-date contact data and company information as well as the automated prioritization of leads are crucial for the efficiency of the sales process.
2. Marketing OS
Includes tools for lead generation, segmentation and other marketing activities. The platform offers tracking tools that measure the success of marketing campaigns. The wealth of available company data can be used for market research and benchmarking.
3. Talent OS
Specializes in recruitment and staffing. ZoomInfo offers dedicated tools for recruiters to identify qualified candidates faster. Recruiters can also use information about competitors to target candidates.
4. Operations OS
Solution for improving data quality. The product includes the RingLead solution acquired in 2021. ZoomInfo can be seamlessly integrated into common customer relationship management (CRM) systems, which increases data consistency.
Overall, ZoomInfo's comprehensive data platform provides tools and information that are valuable across a wide range of business areas. The ability to make both tactical and strategic decisions based on high quality data makes ZoomInfo an essential service for modern organizations operating in an increasingly data-driven business environment.
ZoomInfo is recognized as a premium solution at a premium price in the business intelligence platform segment. In the software industry in particular, ZoomInfo is considered the market leader and has become the de facto standard for supporting the aggressive go-to-market strategies of high-growth SaaS and cloud companies in the boom years till 2021.
Market and Competition
The business intelligence market is becoming increasingly complex and competitive. According to the company, the addressable market for ZoomInfo is a huge 100 billion USD. As always, such figures should be treated with caution.
ZoomInfo competes with a variety of providers in both the traditional data sector and the modern SaaS sector. For years, its main competitors have included LinkedIn Sales Navigator and Dun & Bradstreet, which has been an established player in the business information sector for decades.
Upcoming challengers to ZoomInfo include Demandbase, which, like ZoomInfo, has grown through a series of acquisitions. Even more exciting is the situation surrounding Clearbit, which was acquired by HubSpot at the end of 2023. It is expected that HubSpot could become a serious competitor to ZoomInfo from 2024.
Cause of the Sales Slump
The fact is, however, that ZoomInfo's revenue growth collapsed in 2023. After years of explosive revenue growth (62% in 2020, 57% in 2021, 47% in 2022), growth in 2023 was only 13% to 1.24 billion USD.
ZoomInfo has a broad customer base of more than 35,000 paying customers. Of these, 1,760 (as of end-March 2024) paid more than 100,000 USD for their subscription. This number of large customers fell for the 5th time in a row in Q1 2024, which is probably the main reason for the miserable performance of ZoomInfo shares. Pricing power looks different.
But there is a well-understood reason for the erosion of this segment of the customer base:
The most important sector for ZoomInfo is the software industry. During the boom years, many of these customers were very aggressive about growth and hired (too many) sales and marketing people, partly due to the almost free capital available. They all needed a ZoomInfo licence.
Now the tide has turned, and even in the software industry, profitability is often considered more important than optimising growth. This means that ZoomInfo customers are cutting back on sales and marketing staff. As a result, the subscription bill paid to ZoomInfo is becoming smaller, often falling below the 100,000 USD per year threshold.
This current trend towards cost optimization in the technology industry is the real problem for ZoomInfo. ZoomInfo has not lost the vast majority of these customers, but they are now paying significantly less because they need fewer licences.
That, at least, is my understanding and the core of my investment hypothesis.
ZoomInfo goes GenAI
ZoomInfo is also currently being challenged by a number of AI start-ups. They claim to be able to offer a similar solution to ZoomInfo at a much lower cost with their AI tools, especially for smaller companies with little financial clout. Indeed, investors seem concerned that ZoomInfo could be a loser of the AI age in a few years' time.
These AI tools from young competitors look sexy in a demo, but I doubt that the data quality of ZoomInfo's database, built over many years and with billions of dollars of investment, can be replicated with generative AI. Although that is exactly what the marketing departments of the young challengers like to suggest.
Over the past few quarters, ZoomInfo has lost many small and medium-sized companies as customers who wanted to save on software costs and switched to these challengers. Many of those who were willing to switch are now disillusioned, and ZoomInfo reports that hundreds of customers have already returned to ZoomInfo after such an experiment.
The company has now responded to these new challengers and is offering various GenAI features in the form of ZoomInfo Copilot, which is designed to increase the productivity of sales employees with the help of AI. The ZoomInfo Copilot is currently still in the beta phase; the release is scheduled for the end of 2024 and should then take away some of the competitive pressure.
ZoomInfo Figures for Q1 2024
However, the negative growth trend could not yet be reversed in Q1 2024. Revenue only increased by a meagre 3% to 310 million USD in Q1, and only marginal growth of 2% is now expected for the year as a whole.
One of ZoomInfo's key strengths is its high profitability. The gross margin has increased from around 70% to 84% (TTM) over the last three years since the IPO. In Q1 2024, the gross margin was as high as 86%. This is excellent even for a SaaS company.
ZoomInfo also has its operating costs well under control, with a below-average sales and marketing expense ratio of 32% in Q1 2024. In fact, the declining research and development expense ratio of 14% of sales is a little too low for my taste.
ZoomInfo operates with a high free cash flow margin of 33% (TTM). The operating profit is much lower, mainly due to the significant share-based compensation (around 13% of sales in the last 12 months). However, an operating margin of 20% (GAAP) and a net margin of 6% are quite respectable in challenging times.
Share Buyback
In March 2023, ZoomInfo management initiated an initial $100 million share repurchase program. In July 2023, following a further decline in the share price, a second buyback program of a remarkable 500 million USD was launched. And in Q1 2024, the company followed this up with another 500 million USD buyback program, making it clear that it believes its shares are significantly undervalued.
Over the course of 2023, ZoomInfo bought back 22.6 million shares at an average price of 17.68 USD. In total, 400 million USD was spent on share buybacks. And in Q1 2024, a further 153 million USD was spent to buy back 9.6 million shares at an average price of 15.90 USD.
All these buybacks have so far been a bad deal for shareholders, given the current share price of 13 USD. However, the number of shares outstanding has fallen by 7% over the past 12 months.
Further buybacks are expected in the coming quarters, which the company can afford given its strong cash flow. With 547 million USD of share repurchases still authorized by the board as of 31 March 2024, more than 10% of the outstanding shares could be bought back at the current share price!
ZoomInfo Stock Valuation
Following its successful IPO, ZoomInfo was one of the most sporty valued cloud stocks. At the height of the tech boom in late 2021, ZoomInfo was trading at over 40 times EV/sales and over 100 times free cash flow.
From today's perspective, these valuation ratios look significantly overvalued. ZoomInfo's share price has now lost more than 80% of its highs and the valuation, with an EV/sales ratio of less than 5 and an EV/FCF ratio of 14, is attractive for a (admittedly low-growth) SaaS stock with an 85% gross margin.
My bet is that the current weak growth is just a dip in the long-term trend and not the end of the growth story for an AI-disrupted company.
In my investment case, I assume that ZoomInfo will be able to reverse the current trend after the GenAI hype ends and return to double-digit growth from 2025 or 2026 at the latest. In such a scenario, the current share price below 13 USD should be an excellent entry point. I agree with the majority of analysts who see an average upside of 40% for ZoomInfo.
Conclusion
ZoomInfo has established itself as one of the leading players in the fast-growing but highly competitive market for business data. The company is struggling with sluggish growth after the explosive growth of recent years.
ZoomInfo faces significant challenges in the AI era in a market full of old and new competitors, where differentiation and the ability to deliver valuable insights to customers will be crucial. Unlike its younger competitors, ZoomInfo generates strong cash flow and can operate from a position of strength.
I have added to the position in my sample portfolio following the recent fall in the share price on the occasion of the Q1 2024 figures. I realize that it takes a lot of courage and conviction to swim against the tide in the face of a disastrous chart picture.
If my investment thesis is right, the ZoomInfo share could double in 12-18 months. If I'm wrong, then I'm the fool, because the technical analysts will tell me that 'the chart already knew it' ;-)
Anyway, it remains exciting. If you would like to follow the development of ZoomInfo with me in the future, then you can
*Disclaimer:
The author and/or associated persons or companies own shares in ZoomInfo. This article is an expression of opinion and does not constitute any investment or financial advice.
Very comprehensive take on a stock I knew very little about. Thank you!