A 7% rally had shares of Zendesk (NYSE: ZEN)
among the best-performing stocks on Tuesday and helped propel them to all-time highs. They’ve rallied 20% in the past week and are up a full 110% since the lows of Q1. Though perhaps lesser well known and not as flashy
as many of their Silicon Valley peers, they’re a solid tech stock that’s been doing everything right.
Yesterday’s rally came off the back of an upgrade from Piper Sandler who’s clearly been keeping an eye on them this summer. They upped their rating on the stock from Neutral to Overweight and slapped a big 40% increase on their price target, shifting it from $87 to $113. By the looks of things, the bulls are doing everything they can to get there by the end of the week.
Piper’s analyst Brent Bracelin highlighted a number of key areas that have gone unnoticed by Wall Street but that will play a big role in the company’s future growth. These included the company’s plans for international expansion, an improved outlook in its transactional business and growth in its direct-to-consumer segment.
Zendesk has carved out a strong niche for itself in the cloud platform space. It’s technology is used by a wide range of tech companies who lean on them for customer portals, live chat features and solid integration capabilities with the rest of their stack.
And with a market cap of ‘only’ $11 billion, Bracelin also thinks there’s the chance that one of the big cloud platform players will snap them up. He highlighted the likes of Microsoft (NASDAQ: MSFT), Adobe (NASDAQ: ADBE), ServiceNow (NYSE: NOW), and SAP (NYSE: SAP) as potential suitors.
So there’s plenty of internal and external catalysts for the bulls to be excited about. Zendesk reported solid Q2 numbers at the end of July which shows an internal engine that’s ticking over nicely. EPS and revenue came in ahead of expectations with the latter posting a 26% jump year on year. This is the kind of double-digit growth that’s needed from a tech company and investors should note this is them after a tough quarter.
It’s not all rosy, however. As Jeffries noted with July’s release, a rise in pandemic related churn and general weakness in their small to midsize customers remains a short-term drag. It was enough for management to issue soft revenue guidance for Q3 but that didn’t stop Jeffries maintaining their Buy rating. In a note to clients, they reiterated their Buy rating and said Zendesk’s long term outlook “looks solid”.
This week’s rally bodes well for the rest of the year and it looks like Wall Street has extended their sight to capture the longer-term opportunity. A rising tide floats all boats and this is true both in the short term with regard to this summer’s tech fuelled rally and in the longer term. As tech solidifies its position as the dominant industry for many years to come, cloud-based customer support will be a core requirement for every software company out there.
As the pandemic recedes and economic activity returns to normal for the smaller companies out there, it’s fair to expect current revenue turbulence to recede. This opens the door for Zendesk’s revenue growth to return to the average 30-40% year on year range it had been reporting in previous quarters which should be more than enough to keep the bulls happy.
All in all, investors looking to update their portfolio with exposure to long term tech winners could do worse than pick up a company that just hit all-time highs and has a bright future ahead of it.
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