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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.

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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.

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