1 Do-It-All Software Stock That's Holding Up Well Amidst Market Chaos

Zendesk is free cash flow positive, which is a really good sign given where the economy is today. In this Motley Fool Live segment from "The Virtual Opportunities Show," recorded on May 10, Fool.com contributors Travis Hoium and Demitri Kalogeropoulos take a closer look at Zendesk. 

Travis Hoium: Yeah, Zendesk is one that is kind of an on my radar for a while, but they've had some pretty good results recently. When you think about this is one of the the business to business SaaS plays in the market. Stocks are down generally. This is actually one that was up until at least yesterday. We did on the rank yesterday. We talked about it just for a couple of minutes. But revenue was up 30 percent in the first quarter to $388 million. This is a company that's cash flow positive, just barely, but it is cash flow positive and operating cash flow positive, only $15 billion market cap.

I think when we look at the software business in the tech space right now, what I'm really trying to filter out is, what are the companies that are burning cash with no end in sight to that cash burn? Because those companies are going to run into a number of problems going forward. Either they're going to have to do layoffs or they are going to have to raise capital from debt or equity markets? They're in a bit of a bind, if you will. Companies that are able to generate cash or either right now or in the near future should be in a pretty good position. We may see a low in growth. But, I think long term we're going to see some of these trends come back. Automating, the kind of things that Zendesk does with customer service. I can imagine that's going to slow down. They just keep adding toward their toolkit.

This could be the kind of company that not only operates pretty well in a down-market because they don't need to go raise capital, but maybe they go and buy some companies that are really struggling, that are kind of bolt-on acquisitions that they can incorporate in the business. This is something that I'm thinking about is, who pulls together these 85 different SaaS tools that exists today and makes the next Microsoft, if you will? I'm not predicting that they're going to be as big as Microsoft, but Microsoft does everything. If you're starting a company, you could just use Microsoft tools and you'll be fine. If you're using this small SaaS companies, you've got to have Zendesk, you have to have Asana, you have to have somebody to do email, there's a ton of different tools that you have to put together.

I think given where the market is today, a lot of these companies that are going to get into trouble. They're going to go, hey, we got to merge or be acquired by somebody. There's going to be these players that are able to pull in other tools and come out of this place in the down-market even stronger. I think Zendesk is a really interesting company to look at. It's actually the stocks actually held up well, like I mentioned, and the fact that it's free cash flow positive is just a really good sign given where the economy is today.

Demitri Kalogeropoulos: Yeah, I like Zendesk and one of the numbers I'd like to follow with these guys is, when they have so much recurring revenue and not on there is that I guess they have different terms for a bid Zen [inaudible] net expansion rate, I guess that rate it rolls in the renewal rate and also the average spending per contract, you like to see both those numbers rising and staying really high, something. Customers are signing up, renewing their contracts at higher rates because they are ostensibly happy with the service and they're picking up more. They're choosing to expand what they're spending basically on the portfolio.

Travis Hoium: Yeah. Their net expansion rate was 121 percent last quarter. GDP was negative. Their net expansion rate was 121 percent. I think that's pretty good.