Please ensure Javascript is enabled for purposes of website accessibility

Five9 Just Showed Why It's a Top Stock to Buy

By Daniel Sparks - Feb 23, 2021 at 8:33AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In its fourth quarter, revenue surged 39% -- the tech company's highest quarterly revenue growth rate ever.

If you want a fast-growing tech company with accelerating growth, expanding margins, and enormous market opportunity, look no further than Five9 (FIVN 3.39%). The industry-leading provider of cloud-based contact center solutions is capitalizing on the modernization of customer service solutions, putting its highly scalable business model right in the middle of a generational opportunity.

Five9's strong fourth-quarter performance highlights why this stock may still be a buy today despite a valuation that might seem too expensive.

A diagram of three laptops connecting to a cloud.

Image source: Getty Images.

Accelerating growth

The value proposition of Five9's platform became more evident than ever in 2020. Total revenue during the year rose 33% year over year. Further, the tech company's fourth-quarter growth rate was its highest in history. Revenue during the period rose 39% year over year, marking Five9's third consecutive quarter of accelerating revenue growth.

"Our performance underscores our leadership in the market and momentum on our mission to help customers modernize and transform their contact center and reimagine their customer experience," said Five9 CEO Rowan Trollope in the company's fourth-quarter earnings release.

The CEO cited product innovation, enhanced AI automation, new service offerings, international expansion, and an industry-wide tailwind of organizations looking to modernize their contact centers as key catalysts.

Further, Five9 expects its strong momentum to continue in 2021. "We enter 2021 well positioned to capture the massive market opportunity and expand our leadership position," Trollope said.

A future cash cow?

On the surface, Five9's stock might seem overpriced. The company trades at 30 times sales, even though it's not profitable yet on a generally accepted accounting principles (GAAP) basis. But investors should note that Five9's profit margins are improving, setting the stage for rapid earnings growth over the next five to 10 years.

The company's adjusted gross profit margin in 2020 was 65.5%, up from 64.2% in 2019. Combining this gross margin expansion with strong revenue growth, Five9's non-GAAP (adjusted) net income increased from $52.1 million in 2019 to $67.4 million in 2020. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose from $60.8 million in 2019 to $85.7 million in 2020.

As Five9's business scales, the company could generate not only meaningful profits, but also strong free cash flow. Of course, it will likely take years for these substantial cash flows to start materializing. The company is investing aggressively in exciting growth opportunities (as it should) to take advantage of ongoing cloud migration and the rising importance of customer service.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Five9, Inc. Stock Quote
Five9, Inc.
$102.05 (3.39%) $3.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.