Zuora Due Diligence

The Case for Zuora: The Growth Stock of a Lifetime

Zuora focuses on one, simple to understand niche; cloud software to enable subscription-based services. A subscription-based model is one in which a business may lend or sell goods based on recurrent payments made at decided intervals. Now as you may be able to tell based on news, ads, or generally being a consumer this is a fast-growing and competitive environment where almost all sectors are participating in, and the model has existed since the early 17th century when book publishers had used these platforms to generate consistent revenues from their most loyal readers. The CEO of Zuora believes their product is like CRM for a subscription-based economy: “CRM and ERP systems, however, were designed for products, not for companies with subscription business models. In a world where every customer is now a subscriber, companies must adopt new technology to manage the entire subscriber lifecycle, including new subscriber acquisition, subscription management (i.e. enabling subscribers to upgrade, downgrade, renew and otherwise modify their subscriptions), automating recurring billing and payments, and measuring recurring revenue and subscription metrics”, and in a basic sense this would make Zuora a fintech company, like Square (SQ) or even Rocket Companies (RKT) via automating billing solutions, but Zuora also provides analytics for subscription-based producers such as market trends and relation analysis with subscribers. Zuora’s RevPro accounting and revenue solution aims to “Meet compliance for the latest revenue standards and accelerate your time to close”, and in this subscription-based economy, that efficiency will mean everything. Automating accounting, CRM, sales and marketing, and product management make Zuora the one-stop-shop for SaaS companies like Zoom, DocuSign, and BetterCloud. Considering their new partnership with GoCardless (Zuora and GoCardless Expand Partnership to Revolutionize Global Subscription Payments) and the growing subscription based economy (More Than Half Of US Households Now Subscribe To Multiple Streaming Services – Study), ZUO only has room to grow.

In terms of financials, Zuora has recently increased spending and debt, which is sort of a natural phase for growth stocks like them, but it can be a bit concerning

But as you can also see here, they are consistently generating revenue directly as a result of their tie-ups with SaaS based platforms, and yes the below costs are going up but a majority of them have to do with levering and increased R&D as the product line is still in a growth stage.

But I wouldn’t concern myself with any of these effects as they are common out of growth stocks like ZUO which are constantly seeking out newer opportunities and require more financing. The best part of all this is that SG&A expenses are going down because they are becoming a well-known competitor/service in this space.

Even better is the fact that most of their assets are not financed by long term debt.

And sales have increased so much, that the P/S ratio is lower than it was when the share prices peaked years ago.

And most importantly, FCF has increased which means that the company’s financial structure has allowed for more retention of cash, something that can be necessary when you’re a fledgling company in a volatile and competitive market space.

On top of that, gross profit margins are finally turning around for this year, and should continue to increase for the future.

People are moving further and further away from owning goods which is why we’ve seen the rise in SaaS and PaaS, even from companies like Caterpillar who make industrial equipment for construction and mining, we’ve seen revolutions in how we can be efficient with products and services, and companies like AirBnB and Turo have shown us the consumer mentality going forward. Caterpillar uses Zuora software to manage and interact with those who rent their machinery by installing sensors into the engines of trucks themselves to monitor fuel usage and tow haul, this gives them a better idea of what the consumer needs and makes an immediate impact on future engineering plans, so now even seemingly traditional industries have shifted their focus to subscription planning and management digitally. https://www.thestreet.com/investing/zuoras-ceo-were-seeing-greater-interest-in-subscription-business-models-tien-tzuo?puc=yahoo&cm_ven=YAHOO, in this interview the CEO of Zuora had to say this about their impact on the economy during covid: “"Absolutely. And that’s what really excites us. Companies are...saying, ‘Thank god we’re a subscription business. Thank god we have the resiliency. We can’t imagine managing through this current situation not as a subscription business. We’re not seeing 50, 60, 70%, overnight drops in revenue, that’s just not happening.'

And even [among] the companies that are being adversely impacted by the current environment, they’re shrinking, but they’re shrinking slowly. They’re doing a good job of hanging onto their subscriber bases”,

For the size of the company and its potential future growth, it's extremely undervalued. Zuora has customers ranging from Caterpillar to Zoom, and the leadership is more than confident they'll navigate COVID just fine as the demand for analytics will and automation will increase.

https://www.thestreet.com/investing/zuora-ceo-says-its-on-the-right-side-of-history?puc=yahoo&cm_ven=YAHOO

I’m confident this company will outperform long and short term, and the fact that they’ve picked out just one area to operate in will make it easier for them in the long term as well, and we’ll see costs and debt be cut in the future so that retained earnings and EBITDA can increase causing more market interest in ZUO.