ZoomInfo: Hold or Buy Post Q3 Earnings?

ZoomInfo (ZI) shares traded lower premarket on Wednesday after the company reported third-quarter results. On Tuesday, the company reported revenue of $303.6 million, beating estimates of $299.4 million, and adjusted EPS of 28 cents, exceeding the consensus of 22 cents. Total revenue was down 3% on a year-over-year basis in the quarter. ZoomInfo ended the quarter with 1,809 customers generating $100,000 or more in annual contract value, marking an increase of 12 customers compared to the previous quarter. Adjusted operating income was $111.7 million, down 11% year over year, with a 37% margin. ZoomInfo said it generated $18.2 million in cash flow from operations and $110.7 million in unlevered free cash flow during the quarter. The company ended the quarter with $147.7 million in cash and cash equivalents. Henry Schuck, ZoomInfo founder and CEO said, “Net revenue retention was stable for the third consecutive quarter and we again grew our $100k and million dollar customer cohorts.”

Outlook: ZoomInfo sees fourth-quarter revenue in the range of $296 million to $299 million versus estimates of $296.8 million and adjusted EPS of $0.22 – $0.23 (vs. consensus of $0.23), according to Benzinga Pro. The company revised FY24 revenue outlook to $1.201 billion – $1.204 billion (from $1.190 – $1.205 billion) vs $1.198 billion estimate and adjusted EPS to $0.92 – $0.93 (from $0.86 – $0.88) vs. consensus of $0.88. Investors can gain exposure to the stock via WisdomTree Cloud Computing Fund WCLD.

Price Action: ZoomInfo shares were down 15.1% at $11.10 premarket at the last check Wednesday. Photo via Alexandra Koch from Pixabay

Over the past six months, ZoomInfo’s stock price fell to $9.95. Shareholders have lost 9.9% of their capital, which is disappointing considering the S&P 500 has climbed by 12.6%. This may have investors wondering how to approach the situation.

Despite the more favorable entry price, we don't have much confidence in ZoomInfo. Here are three reasons why you should be careful with ZI and a stock we'd rather own.

Why Is ZoomInfo Not Exciting?

Founded in 2007 as DiscoveryOrg and renamed after a merger in 2019, ZoomInfo (NASDAQ:ZI) is a software as a service product that provides sales departments with access to a database of prospective clients.

1. Billings Hit a Plateau
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Over the last year, ZoomInfo failed to grow its billings, which came in at $282.4 million in the latest quarter. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation.
2. Customer Churn Hurts Long-Term Outlook
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
ZoomInfo’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 85.5% in Q3. This means ZoomInfo’s revenue would’ve decreased by 14.5% over the last 12 months if it didn’t win any new customers.
ZoomInfo’s already poor net retention rate has been dropping over the last year, warning us that its customers are churning and that its products might not live up to expectations.
3. Operating Margin Falling
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, ZoomInfo’s operating margin decreased by 8.5 percentage points over the last year. Even though its historical margin is high, shareholders will want to see ZoomInfo become more profitable in the future. Its operating margin for the trailing 12 months was 11.2%.

Final Judgment

ZoomInfo’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 3.1× forward price-to-sales (or $9.95 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at our favorite picks and shovels play for semiconductor manufacturing.

Stocks We Like More Than ZoomInfo

With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle. Put yourself in the driver’s seat by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years. Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.