Why Zendesk Inc. Shares Zipped Higher Today

Is Zendesk's jump meaningful? Or just another movement?

May 19, 2014 at 5:41PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Riding of wave of positive momentum following its initial public offering last week, shares of Zendesk (NYSE:ZEN) surged more than 17% early Monday. The stock settled to close up around 8%. 

So what: Zendesk priced its IPO last Wednesday at $9 per share, then jumped nearly 50% in its first day of trading Thursday. Given the recent broad weakness in tech stocks, many investors were encouraged by the cloud-based customer service software provider's strong start.

Now what: Zendesk's Form S1 reveals its top line is growing quickly, with 2013 revenue increasing 89% year-over-year $72 million. Still, that translated to a $22.6 million net loss over the same period, which means Zendesk has plenty of work to do as it strives toward sustained profitability.

Of course, it's not terribly uncommon for cloud-based software companies to forsake near-term profits in the name of growing sales and market share. But I still prefer not to engage in the relatively unpredictable volatility that often comes with recently IPOd businesses. For now, I'm holding Zendesk on my watch list to keep tabs on its progress over the next few quarters. If it can further demonstrate its current growth is sustainable over the long-term, there should be plenty of time for patient investors to build their positions.

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Steve Symington and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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