A first look at ZoomInfo Technologies
In my first four e-mails this week, I took a "quick glance" at 22 beaten-down stocks and invited my readers to let me know which ones they wanted me to take a closer look at.
There were votes for almost all of them, so I know what I'll be busy with for the next few weeks!
The last stock I covered in yesterday's e-mail was cloud-based software company ZoomInfo Technologies (GTM) – not to be confused with Zoom Communications (ZM), known for its ubiquitous video conferencing.
ZoomInfo is a weird little company that provides a business-to-business data intelligence platform. I'd never heard of it until reader Michael F. flagged it for me, writing:
The market is really punishing it because investors think AI is going to replace its data, despite 75% of its revenue being enterprise-level contracts.
Just as with Intuit (INTU) and others, when it comes to business customers, AI is not going to replace the one-throat-to-choke vendors, plus the organizational upheaval such a change can cause – smaller businesses will be even more loathe to change.
Today, I'd like to take a "first look" at ZoomInfo's financials. Then on Monday, I'll dive deeper into the business and its future prospects...
It's one of the cheapest stocks I've ever come across, having declined 97% from its November 2021 peak. Take a look at this chart I shared yesterday:
I continued with a quick overview of some recent numbers:
Based on this chart alone, I expected to see financials in full-scale collapse. But instead, I saw that revenues, profits, and FCF have been flat for the past few years. FCF in the past 12 months – and the past four years – was $376 million.
Meanwhile, share repurchases have averaged $477 million in the past three years and were $410 million in the past year. This has reduced the share count by 20% in the past two years.
The main reason for the stock's decline is its P/E multiple. It once traded at 160 times forward earnings. Today, it trades at 2.5 times this year's earnings estimates. That's not a typo – not 25 times, but 2.5 times!
I concluded that based on these numbers, ZoomInfo looks "pretty interesting." It appears to be a good business...
Like most software companies, it has high gross, operating, and net income margins: 87%, 22%, and 10%, respectively.
Importantly, margins have remained steady even as the stock has collapsed:
The company was a tremendous growth story from 2018 to 2023, as revenue and operating income both rose more than 700%.
They've flatlined since then, but they're not declining:
Free cash flow ("FCF") has followed the same trajectory:
After large acquisitions in 2019 and 2021, ZoomInfo has pivoted to using all of its FCF (and then some) to buy back shares:
Here's a breakdown of how much it has spent on share repurchases by quarter – a total of $1.55 billion for a company with a market cap of only $800 million today:
The repurchases in 2023 and 2024 didn't reduce the share count much because the stock was trading at 5 times to 10 times today's price.
But since 2024, at lower prices, the repurchases have been quickly reducing the share count – by about 10% per year, as you can see in this chart:
The amount spent on repurchases has exceeded FCF, so debt has risen from $782 million to $1.4 billion in the past two years. That's not a great trend, but it's a manageable level assuming the company can continue to generate roughly $400 million of annual FCF:
In summary, ZoomInfo's financial picture is mediocre at best. After a period of high growth, revenues, profits, and FCF have stalled out.
So I can see why the stock might have fallen by 50% in recent years – maybe even 75%. But plunging 97% to trade at less than 2.5 times earnings?
What's going on here? Is the business about to go off a cliff due to disruption from AI and/or problems servicing its debt?
Or are investors, having been burned again and again trying to catch a falling knife for four and a half years, making a big mistake by pricing this stock way too low?
On Monday, I'll take a deeper dive and explore these questions, so stay tuned...
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.