Please ensure Javascript is enabled for purposes of website accessibility

1 Software-as-a-Service Stock Worth Holding for the Long Haul

By Daniel Sparks – Aug 4, 2021 at 8:07AM

Key Points

  • The Street may be too focused on Zendesk's second-quarter revenue miss.
  • Zendesk Suite is morphing into a meaningful catalyst for the software-as-a-service specialist.
  • Management is optimistic about the company's momentum and market opportunity.

Motley Fool Issues Rare “All In” Buy Alert

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

The stock's recent move lower fails to appreciate the company's accelerating revenue growth.

As earnings season nears its tail end, some stocks are trading higher following their earnings reports and others are trading lower. But investors shouldn't automatically assume the stock's recent direction is an indication of the underlying business.

One software-as-a-service stock that has fallen recently that arguably may not have deserved it is Zendesk (ZEN). The software-as-a-service customer support specialist is firing on cylinders, with revenue growth accelerating.

Here's a closer look at the fast-growing business -- and investors may want to hold onto their shares despite the stock's recent weakness.

Zendesk support dashboard metrics.

Image source: Zendesk.

Accelerating growth

Helping explain the market's recent negative reaction to Zendesk's earnings release, the company's second-quarter revenue barely missed analysts' average forecast for the metric. Revenue was $318.2 million and analysts were modeling for $319.8 million. Earnings per share missed analysts' forecast, too.  

But investors shouldn't be too hard on Zendesk. After all, the company had to grow revenue 29% year over year to achieve a top line of $318.2 million. This is an acceleration from 26% growth in the first quarter of 2021 and 23% in the fourth quarter of 2020. 

Zendesk Suite: A powerful catalyst

Also worth highlighting is Zendesk's momentum in its February-launched Zendesk Suite product. The reoccurring revenue product is a collection of Zendesk offerings, which together represent a total omnichannel support solution.

Zendesk said adoption of Zendesk Suite more than doubled sequentially in Q2, accounting for 16% of annual recurring revenue -- up from 7% in the prior quarter. Further, Zendesk said it has already accumulated more than 8,000 Suite customers.

The product's popularity is helping the company make deeper connections with its customers.

"Sales to new customers are primarily for Suite, enabling a broader adoption of the complete Zendesk solution from the outset," said Zendesk in its second-quarter earnings release.

Zendesk continued:

As a result, we believe we are becoming more entrenched within their customer support infrastructure, driving higher reliance on our solutions, higher retention, stronger revenue growth and better visibility long-term.

Management is optimistic

Finally, management should note that Zendesk lifted the low-end of its full-year revenue outlook, reflecting management's confidence in the tech company's momentum.

Zendesk now expects full-year revenue to be between $1.310 billion and $1.318 billion, up from a previous forecast for revenue to be between $1.298 billion and $1.318 billion. 

"We are well-positioned for sustainable, durable growth as companies rapidly adapt to a digital-first economy," Zendesk said. "The pandemic has made operating online an imperative for businesses across every industry." In addition, management noted that a reopening economy is introducing a "new set of challenges and demands -- all of which must be addressed quickly and accurately."

Zendesk shareholders should be cautious about clicking the sell button just because shares are trading lower. This is a strong business with significant long-term potential.

Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Zendesk. The Motley Fool has a disclosure policy.

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

Zendesk Stock Quote
Zendesk
ZEN

*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 analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

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.