The stock of Zendesk (NYSE:ZEN, 30-year Financials) gives every indication 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 $135.04 per share and the market cap of $16 billion, Zendesk stock appears 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 25.37% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Zendesk has a cash-to-debt ratio of 0.81, which ranks worse than 73% of the companies in Software industry. Based on this, GuruFocus ranks Zendesk's financial strength as 4 out of 10, suggesting poor balance sheet. 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 $1.1 billion and loss of $1.93 a share. Its operating margin is -13.93%, which ranks worse than 73% 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate 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 way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Zendesk's return on invested capital is -11.30, and its cost of capital is 9.08. The historical ROIC vs WACC comparison of Zendesk is shown below:
Overall, Zendesk (NYSE:ZEN, 30-year Financials) stock 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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