Initial public offerings (IPOs) are hot again. And perhaps no company exemplifies this more than ZoomInfo Technologies (NASDAQ:ZI). Prior to this year, very few investors were talking about ZoomInfo, or even were aware of the company. Now, ZI stock is one of the trendiest names around. Shares have more than doubled since they IPOed at $22 on June 4.
Even if you didn’t get in at the IPO price, you could still make quick gains. ZoomInfo opened trading at $34 and is now at $50. That’s a pretty amazing return inside of a month. It’s particularly impressive since this isn’t a small company either.
At current trading levels, ZoomInfo has a market capitalization of around $20 billion, immediately making it a formidable player in the software-as-a-service space. So what is ZoomInfo, and should you own some?
A Closer Look at ZI Stock
From the company’s prospectus, we find that its core mission is to be:
“[A] leading go-to-market intelligence platform for sales and marketing teams. Our cloud-based platform provides highly accurate and comprehensive information on the organizations and professionals they target. This “360-degree view” enables sellers and marketers to shorten sales cycles and increase win rates by delivering the right message, to the right person, at the right time, to hit their number.”
The company points to the considerable success that it has already achieved. At the time of the IPO, ZoomInfo had more than 200,000 paying customers, 630 of these customers spend at least $100,000 per year on the company’s software. The company generates revenues entirely from subscriptions, and it estimates that its total addressable market is currently $24 billion per year.
More specifically, the company is currently a leader in collecting publicly-available information and organizing it for salespeople. As you know, there’s a ton of data, including contact information, on the internet. But much of it isn’t well-organized or centrally located. By finding it and assembling it into an easy-to-use package, ZoomInfo gives its clients a big leg-up in their own sales and marketing process.
One other important note before we move on. You probably already know this, but just to be clear, there is absolutely no connection between ZoomInfo and Zoom Video (NASDAQ:ZM). They’re entirely different businesses, management teams, and capital structures. Anyone buying ZoomInfo thinking it is a video conferencing play is making a mistake.
The good news starts at the revenues line. ZoomInfo pulled in nearly $300 million in sales last year. Impressively, that figure more than doubled from 2018’s haul.
Also, of note, ZoomInfo is already profitable on an operating basis. That’s quite rare among new technology IPOs nowadays. That profitability does come with an asterisk. After paying interest on its debt, ZoomInfo was unprofitable last year. However, with the capital it raised from the IPO, ZoomInfo should be able to clean up its balance sheet and further improve its earnings profile.
Going forward, the company’s growth appears to continue to be on a solid trajectory. The company’s revenues should surpass $500 million this year. And the novel coronavirus does not appear to have had a major impact on the business either. If anything, improved sales and marketing spend is even more important right now given the drastic changes in the economy.
Competition is the main concern for ZoomInfo. The company sees its addressable market at $24 billion and its market cap is already up to $20 billion. As such, it needs to secure a large portion of the total addressable market for the investment to be highly-profitable on a long-term basis.
However, there are plenty of other rivals that want the same customers. On the more sophisticated end, you have companies like Microsoft’s (NASDAQ:MSFT) LinkedIn that have vast quantities of customer data as well. On the low end, it’s easy for data scrapers to sell similar data to ZoomInfo, albeit with generally lower quality and a more complicated user experience.
Another concern is that ZoomInfo uses multiple classes of stock with different voting rights. As a result, as it stands now, insiders hold 89.6% of the total voting shares of ZoomInfo. In the event that the company started heading in a poor direction, it would be difficult to force insiders to make changes.
ZI Stock Verdict
As long as the hot market for software-as-a-service stocks continues, ZoomInfo shares could easily continue powering higher. Valuations — in particular price/sales multiples — are hitting record highs across the industry.
Compared to other hot names like Fastly (NYSE:FSLY), Zoom Video, and Alteryx (NYSE:AYX), there’s more room for near-term gains at ZoomInfo.
At some point, however, expect ZoomInfo to take a breather. Remember, the public offering was at $22 and it started trading at $34 just a few weeks ago. At $50, there’s already a good chunk of speculative premium built into shares.
At this point, the company really needs to get a few more quarters of growth under its belt to back up its valuation.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.