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.
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.