The stock of Zendesk (ZEN) plunged 14% on June 9 after the company said it would remain independent following a strategic review. The cloud-based customer relationship management (CRM) company had been mulling a sale, but said the process ultimately "did not yield any actionable options" amid "adverse market conditions and financing difficulties" for its final bidders.
In a statement, CEO Mikkel Svane said its board "unanimously determined that the right path to sustainably grow stockholder value lies in advancing Zendesk as an independent business."
That statement indicates Zendesk's investors shouldn't count on a buyout to generate fresh interest in its stock, which has declined more than 50% from its all-time high last February. So is it too late to invest in this company, which was once considered a resilient underdog in the CRM market?
What happened to Zendesk?
Zendesk doesn't provide a full suite of enterprise-facing cloud-based CRM services like Salesforce (CRM 3.22%) does. Instead, it provides simpler chat-based customer support and ticketing services for smaller companies. As an organization expands, it can gradually integrate Zendesk's services into Salesforce's broader ecosystem of CRM services.
Zendesk's revenue rose 26% in 2020, then grew 30% to $1.34 billion in 2021. Its revenue increased another 30% year over year to $388 million in the first quarter of 2022, and it anticipates 26% to 28% growth for the full year.
Its adjusted gross margin expanded from 79% in 2020 to 82% in 2021, then rose to 83% in the first quarter of 2022. It attributed that expansion to its improving scale and infrastructure efficiencies.
Zendesk isn't profitable yet on the basis of generally accepted accounting principles (GAAP). But its adjusted earnings per share increased 68% in 2020 and 21% in 2021, and analysts expect 14% growth this year.
Ugly clashes with its top investors
Those growth rates look stable, but Zendesk irked its top investors by agreeing to buy Momentive Global (MNTV), the parent company of SurveyMonkey, in an all-stock deal last October.
Zendesk said that acquisition would "accelerate Zendesk's revenue plan to $3.5 billion in 2024, one year ahead of its previous target." But critics claimed the deal would severely dilute its existing shares and reduce its operating margins. They also pointed out that Svane and Momentive's CEO Zander Lurie are close friends -- a personal relationship that might have convinced Zendesk to essentially bail out Momentive's weaker business.
Zendesk terminated that $4.1 billion takeover bid this February after a mere 9% of its investors approved the deal. That same month, the company rejected an unsolicited bid from several private equity firms that valued the company at $127 to $132 per share, even though Jana Partners -- the activist investing firm that had adamantly opposed the Momentive deal -- had been aggressively pushing the company to sell itself. Zendesk's stock now trades below $70 a share.
Jana Partners also recently sued the company for failing to schedule its annual meeting, which was usually held in May, for the current year. In response, it finally scheduled its annual meeting for Aug. 17. All these ugly clashes, along with the ultimate decision to remain independent, have cast a dark cloud over the business and its long-term prospects.
Should investors tune out the near-term noise?
When Zendesk's stock closed at its all-time high of $158 last February, the company was valued at $18.6 billion, or 14 times the revenue it would actually generate in 2021. Today, it has a market cap of $8.5 billion -- or just five times the revenue it expects to generate in 2022.
Salesforce, which expects to generate 20% revenue growth this year, trades at six times that estimate. In other words, Zendesk's stock still looks cheap relative to its growth rates and industry peers.
However, Zendesk's clumsy attempt to buy Momentive and its unwillingness to sell itself arguably justify its lower valuation. The bulls might dismiss those missteps as near-term noise, but the bears likely believe its bid for Momentive suggests it's running out of room to grow in its niche of the fragmented CRM market.
Zendesk is still growing, but it arguably makes more sense for investors to simply buy Salesforce -- which leads the enterprise CRM market -- instead of investing in the underdog in this unforgiving market for imperfect growth stocks.