Global Beta Advisors’ Company Profile of Zendesk, Inc. (ZEN)

by Justin Lowry, President & CIO, Global Beta Advisors, LLC

Global Beta really likes Zendesk because of its high growth potential in customer service software, which is the major subindustry of customer relationship management (“CRM”). While Zendesk has seen its stock rise exponentially over the past year (as of 03/31/21), we believe the continued growth potential in CRM still provides Zendesk with tremendous value, especially considering it is still an emerging company within the industry. The evolution of CRM is at a critical inflection point as business leaders navigate a post-pandemic sales cycle. We believe the efficiencies that were picked up out of need during the pandemic will now become the basis for customer relations. This theme is consistent with many other industries that will likely continue the use of the technological efficiencies picked up during the pandemic. We believe that more capital will be spent on CRM-based software than on manpower, which lends well to the industry itself as well as the players that are demonstrating the greatest level of innovation. Below is a chart illustrating the growth in the industry and the market share growth by the companies that make up the industry:

Customer Service Software Industry Growth

Based on data from Factset Fundamental, measured from 12/31/19 through 12/31/20

  • Revenue growth in CRM has increased nearly 22%, year over year, as of 12/31/20.
  • Zendesk grew its market share nearly 4% to roughly 10% of the industry, as of 12/31/20. This represents the 6th largest market share increase in the space and a market share increase that more than doubled (“CRM”) over that period.
  • Zendesk’s price-to-sales has become elevated at a multiple of 14.86 with a roughly -8% operating margin, as of 03/31/21. However, the company is still enduring a maturation process.  To bring context to Zendesk’s potential for scale, Salesforce’s current operating margin is 15%, as of 03/31/21.
  • Assuming Zendesk can achieve a similar scale to Salesforce, according to our calculations, that would reduce their sales growth hurdle to approximately 36% per year of the next 10 years. Given its ceiling as a company and the ceiling of the industry, we believe this to be an attainable growth rate.

Data: Factset Fundamental

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