Zuora (ZUO) is a B2B company empowering subscription model businesses to help keep customers happy and create long-term relationships.
Zuora’s cloud technology allows businesses to design relevant interactions with customers by combining subscriptions, billing, and financial solutions into one neat package. Its framework also offers real-time insight into subscriber identity and performance – it’s not just subscriptions.
But a great product didn’t save Zuo recently. Shares of Zuora (ZUO) took a nosedive to the tune of 35% in just a few days at the end of Q3. The plummet followed a disappointing earnings call.
So what’s next, is Zuora stock a buy or a sell?
What Does Zuora Do?
Some of the key aspects of Zuora’s business model include:
- Creating subscription products
- Offering bundles that work for customers.
- Customer acquisition and lifecycle management, such as renewals, upgrades, add-on products, or cancelations.
- Providing a way to understand subscribers, measure your business’s health, and more – all from a single viewpoint.
- Automating billing and collections, and even recognize revenue, to save time.
A snapshot of the products offered by Zuora include:
- Zuora Billing
- Zuora Revenue
- Zuora Collect
Each program is built upon Zuora’s Central Platform. By centrally housing all programs, the system is flexible and prioritizes long-term relationships with customers.
So, with all its expansive product line, and partnerships with some of the world’s largest companies, what happened that caused Zuora’s share prices to drop?
Hard Times at Zuora?
The pandemic hit Zuora hard. This might appear unusual on its face for a SaaS company – especially when what Zuora (ZUO) offers is totally apropos today. And when so many other SaaS companies appear to be flourishing. And Zuora’s customers are other large-scale companies. So, why is Zuora floundering?
Zuora’s business model is tied to consumer spending. The company offers subscription-based companies a way to provide said subscriptions to consumers.
A lot of industries suffered throughout 2020 and some continue to – if consumers are saving their money now, buying less subscription services, the large companies offering those subscriptions won’t spend as much with Zuora.
And that’s exactly what happened.
Consumer spending didn’t taper off, if fell off a steep cliff. Certain subscription-based services, such as Netflix (NFLX) and DocuSign (DOCU) continue thriving – others, like Zoom (ZM) have pulled back.
Services that are floundering spend less with Zuora. Some have had to go out of business. As a result, Q2 2020 showed higher-than-average customer loss and lower customer spend.
This caused Zuora’s retention rate to sink below 100% – the first time in the company’s history. It also hit the company where it hurts – revenue growth.
Zuora’s revenue grew 17% in 2019 and slowed to a crawl at 8% in 2020. This, in turn, weakened the company’s stock, with prices falling 31% in 2020.
Better Days Ahead?
So, is Zuora on its way back to the black?
Consumer spending is on the rebound. And that trend could persist as consumers and businesses alike become ever better at pandemic-induced adaptation.
As consumer spending returns to normal, the subscription-based businesses that struggled most during COVID will continue bouncing back – the so-called Subscription Economy will be revived.
And the result?
Zuora delivered strong Q2 results with subscriptions soaring 23% compared to last year. Transaction volume popped higher too to the tune of 42%, reaching a staggering $18 billion.
The company is closing in on almost 700 customers paying over $100,000 in annual contract amounts, a year-over-year increase of 8%.
For the most recent quarter, net retention sat at 108%. Net retention means that customers already using Zuora spent 8% more than they did the prior quarter. Last year the number dropped to 99% in the same quarter.
Management expects a loss of $0.02 – $0.03 per share, based on sales of $86-$87 million. These numbers eclipse the average analyst estimate.
Expect more subscription-based companies to spend more at Zuora or return if they had to leave due to the pandemic. Subscription-based companies that emerged in 2021 will reach out to Zuora.
The next several quarters should show accelerated customer growth and improved financial results. So, don’t count Zuora out just yet – this is a company poised to rebound.
Could Zuora Rise To $22?
Possibly, and perhaps rather quickly.
Consumer product sellers continue adopting the subscription-based business model, meaning Zuora could recover its growth rate – maybe even back to the levels it saw in early 2020. Share prices could double and remain high for as long as the next decade.
Zuora’s revenue could climb as high as $1 billion by the end of the decade and with operating margins of around 30%. If that happens, EPS could raise to around $1.30, which could on the high end result in ZUO share price doubling.
The current economic downturn that’s holding Zuora back. Once this ceases, and it should in upcoming quarters, the stock should rebound to its 2020 highs.
From a discounted cash flow analysis forecast, the upside potential sits about 27% higher at the time of research with a ZUO target price of $22.
Is Zuora Stock A Buy – The Bottom Line
Although the company is almost fully valued at current levels, it still has upside surprise relative to what analysts are projecting and that could lead to a further boon in share price.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.