Will Zendesk's Plan to 3x Revenue by 2025 Pan Out?

Zendesk (ZEN) plans on tripling revenue between now and 2025. Are investors buying into that projection? In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on Feb. 16, Motley Fool contributor Brian Feroldi discusses how the software company is planning to reach its goal with the help of its Momentive (MNTV) acquisition.

Brian Feroldi: Moving on to Zendesk, ticker symbol ZEN. This is a platform that provides customer relationship management tools for businesses. Historically, this has been a very good investment, growing very quickly. A couple of things I want to touch on right off the bat though, the company got a buyout offer from a private equity firm between $127 and $130 per share. The board basically said "No, we're not interested in that" and rejected it. Two, the end of last year since our last time we've done this update, the company made an acquisition offer and is acquiring a company called Momentive. If that name is like, who the heck is Momentive? Try this. SurveyMonkey. SurveyMonkey changed their name to Momentive and I have some more slides about that in a little bit but let's get to the quarter. Revenue grew 32% in the most recent quarter to $375 million. The net expansion rate, meaning, excluding churn, was 122%. That's historically high for this business. The company aims for 110% to 120% so it was a really good job job on that front. On the flip side, customer count, the number of active customers that are using the product, is down 1% to 111,000. I wonder if we're going to talk about that later. What's going on there? Well, the management noticed that it launched a new product called Zendesk Suite about 11 months ago and it's focusing a ton of efforts into that. As a result of that, they discontinued or stopped marketing two other products called chat only and support essentials. This is an attempt to continue to move upstream. That's what this company is doing, moving upstream to higher and higher price enterprises. As a result of that, some of their users that were using those lower-priced companies were declining so that has caused the number of users to actually hold pretty steady. But again, revenue growth year was 32%. The rest of the income statement was mixed. Gross margin on an adjusted basis up 220 basis points to 81.6%. However, the company is making major investments in research and development and sales and marketing. Despite that, non-GAAP operating margin was up slightly to 7.2% although it's negative on a GAAP basis. On a cash basis though, the company generated $28 million in free cash flow during the quarter and they have more than $1.6 billion in cash on the books. Now, management did give some guidance for the numbers. I do actually have some slides to share on that. This is related to the deal so, again, Momentive owns SurveyMonkey so they also get feedback and they handle the market research side. This is giving their customers tools for how customers think and feel, and Zendesk is how customers actually behave and act. Management believes that the deal is going to combine two sizable businesses together and that there are all complementary reasons for doing so. But, it's a pretty sizable deal for Zendesk to make and adds a whole bunch of revenue to the topline. Looking forward, management believes that by 2024, a full year revenue will be $3.5 billion and, in 2025, $4.5 billion. Their old revenue target was $3 billion. They believe that this acquisition will really help them to scale and achieve that for the full year. Full year last year, total revenue was $1.3 billion. The company plans on tripling revenue between now and 2025 while simultaneously generating free cash flow and keeping margins relatively stable. The overall big picture for Zendesk is, thesis largely on track but the acquisition certainly isn't a slam dunk and there are things to watch.