We cover a lot of IPO stocks. Now and then, some that shouldn't get lost do. Zendesk (NYSE: ZEN ) is that sort of company. The stock began trading on May 14 and is up over 80% since. Below, I've outlined three reasons why I expect the rally to continue.
Behind the buddha
First, let's cover what Zendesk is and where it came from. Founded in 2007 by Morten Primdahl, Alexander Aghassipour, and Mikkel Svane, Zendesk offers clients a cloud-hosted platform for handling customer service issues. Historically, this market is known as "help desk" software and is served by some of the tech industry's biggest names.
None are so dangerous as Salesforce.com (NYSE: CRM ) and its Desk.com offering, which last month got a series of upgrades aimed at helping agents close cases faster. The goal? Create an entry point and then "upsell" the rest of the Salesforce platform.
"We can take our customers anywhere they want to go. That's something no other point solution on the market can say," Desk.com General Manager Leyla Seka told PC World in an interview.
Primdahl, Aghassipour, and Svane might agree. Zendesk is laser-focused on giving clients what it calls a "beautifully simple" customer service experience.
Venture capital backing from the likes of Charles River Ventures, Benchmark Capital, and Matrix Partners helped the company gain its footing early, leading to years of outsized growth. Revenue and gross profit have more than quadrupled since 2011. Customer accounts are up about the same amount -- from about 10,000 to more than 40,000 -- over the same period.
Success is drawing a crowd. Zendesk cites five specific case studies in its prospectus, including a multiyear engagement with upstart car service Uber:
"If a driver partner receives a rating of three stars or fewer, a ticket is automatically generated in our customer service platform. Uber was able to do this by taking advantage of our API. The Uber support team proactively follows up with these users to better understand the situation, learn how they can improve, offer a credit at times, and do what they can to make sure the user leaves with a positive feeling about the brand."
Sharpening its engagement with customers has been a boon for Uber, which now ranks as one of the world's most valuable pre-IPO services companies. Last month, VC and private equity investors poured $1.2 billion into the company at an $18.2 billion valuation.
Three reasons to meditate about owning Zendesk stock
With this sort of track record for helping clients, I think it's fair to say Primdahl, Aghassipour, and CEO Svane have built Zendesk into a valuable service. But is the stock a good value? Here are three reasons why I'm picking it to outperform my CAPS portfolio:
1. A large addressable market. Zendesk sees itself catering to the estimated 76 million small and medium-sized businesses out there. "We believe that many of these organizations have not been able to implement or afford legacy customer support software and therefore represent a substantial greenfield market opportunity for our customer service platform," the company says in its prospectus. Analysts would appear to agree, targeting 35% annualized profit growth over the next five years.
2. An expanding, data-driven opportunity. Zendesk has built an extensible platform that connects with over 100 apps for pulling in and analyzing customer service information. Collectively, the system has tracked over 10 billion service tickets from more than 300 million customers over the years, giving the company a broad view of service trends. A new product called Zendesk Insights allows clients to tap that information for finding new ways to improve customer relationships.
3. Engaged founders who are also owners. Two of the three founders -- Aghassipour and Svane -- still own more than 5% of the business each, S&P Capital IQ reports. All three hold either executive or technical roles in the company: Svane is CEO, Primdahl is chief technology officer, and Aghassipour is chief product officer. That's a good sign. As an investor, I prefer to back founders who have more at stake than I do.
With a big market opportunity, a well-liked product that improves with use, and engaged founders leading the way, I see Zendesk stock outperforming over the next several years. Do you agree? Do you use Zendesk? Leave your take in the box below.
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