The stock of Zendesk (NYSE:ZEN, 30-year Financials) shows every sign of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $146.36 per share and the market cap of $17.3 billion, Zendesk stock is believed to be modestly overvalued. GF Value for Zendesk is shown in the chart below.
Because Zendesk is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 27.6% over the past three years and is estimated to grow 25.55% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Zendesk has a cash-to-debt ratio of 0.83, which is worse than 72% of the companies in Software industry. GuruFocus ranks the overall financial strength of Zendesk at 4 out of 10, which indicates that the financial strength of Zendesk is poor. This is the debt and cash of Zendesk over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Zendesk has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $1 billion and loss of $1.89 a share. Its operating margin is -15.14%, which ranks worse than 74% of the companies in Software industry. Overall, the profitability of Zendesk is ranked 3 out of 10, which indicates poor profitability. This is the revenue and net income of Zendesk over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Zendesk is 27.6%, which ranks better than 86% of the companies in Software industry. The 3-year average EBITDA growth rate is -15.3%, which ranks worse than 83% of the companies in Software industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Zendesk's return on invested capital is -12.20, and its cost of capital is 9.16. The historical ROIC vs WACC comparison of Zendesk is shown below:
Overall, The stock of Zendesk (NYSE:ZEN, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks worse than 83% of the companies in Software industry. To learn more about Zendesk stock, you can check out its 30-year Financials here.
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