Shopify’s robust digital platform has been helping it gain traction and retain customers to the tune of 820,000 online stores and counting.
Zendesk continues to provide customer service solutions for its customers with innovations like messaging app support and continues to scale through its acquisitions.
While both software-as-a-business (SaaS) companies drive revenue in different ways, they do work together to help each other customer more successful in their businesses. But knowing whether or not investing in either of these SaaS stocks is worthwhile calls for breaking down the pros and the cons. Here’s what you should know:
Pros and Cons of Investing in SaaS stocks
SaaS stocks are companies that make their revenue by selling their clients software that they access online. To get access to this software, they must sign up for a subscription that can be a monthly or yearly plan.
Unlike the old way of buying software, downloading it onto a computer and paying just once, SaaS offerings allow customers to pay a lower upfront fee and access the produce on almost all devices without limiting themselves to one particular computer.
But it’s essential to understand the advantages and disadvantages of investing in these types of companies. Consider these factors below:
Pros. SaaS companies have a competitive advantage, thanks to the flexibility and mobility of their platforms. Most software is limited and often only allows customers to use it on one device. However, SaaS companies provide the convenience of making their platforms and software from multiple devices or for a large or remote workforce.
Moreover, several SaaS companies use a subscription service business model. A massive advantage to this is that SaaS companies typically earn recurring monthly revenue. This makes it easy for these companies to forecast revenue so they can better direct company growth based on these projections.
Cons. One caveat to investing in SaaS companies is that they usually do not perform well during hard economic times.
If customers lose jobs or revenue is no longer coming in, they may cancel their subscriptions. That means their stocks run the risk of not being able to perform well in the market.
Is Shopify Undervalued or Overvalued?
Shopify [NYSE: SHOP] has become a behemoth in the e-commerce platform space.
Shopify makes it easy for business owners to step up an online store using their platform so that owners can easily sell their products and control how the store customers view their stores.
Shopify’s customers can also purchase apps to make their online stores standout. Thanks to Shopify’s reliable product and innovations, it’s been able to perform well over the years.
In 2015, Shopify had a gross merchandise value of $8 billion. As of 2018, that number grew exponentially to $40 billion.
But if you take a closer look at the stock, you may see why analysts believe SHOP is overvalued. Three key factors stand out for the stock’s overvaluation.
(1) The company’s loss from operations has grown, and its operating expenses are now outpacing gross profits.
(3) The company’s merchant services are growing faster than their subscriptions. Subscriptions are the bloodline of SHOP’s bottom-line profits, so this value must increase.
Should You Invest in Zendesk?
Zendesk [NYSE: ZEN] has been around since 2007 with the company goal of helping their business customers build a more intuitive customer service software that helps them develop better relationships with their customers.
The software enables companies to track and solve customer complaints on a shareable interface easily. Since the company started, it has grown and now offer more features, such as live chat software and a cloud-based call center.
Moreover, Zendesk’s customer base has grown year after year ever since the company went public.
What makes Zendesk a standout stock is that its enterprise customers are growing. In 2015, enterprise customers accounted for only a quarter of Zendesk’s revenue but had since grown to 40 percent of its revenue.
Subscriptions continue to grow as well as revenue from add-on services. However, Zendesk’s stock price has tripled since 2016, so it’s much pricier to purchase.
Shopify Vs Zendesk Stock: The Bottom Line
When comparing the SHOP and ZEN stocks, both stocks have a history of performing well over the past few years.
These stocks are also now trading at all-time highs and continue to do so quarterly. However, Shopify stock is likely trading at an overvalued share price and more expensive compared to its peers.
Analysts project its stock price may exceed $350 per share.
ZEN is cheaper than SHOP and shows great promise for the future. However, when comparing its numbers, revenue, growth to Shopify, Shopify may be a better investment option.
Their business models also allow for them to up-sell and cross-sell customers, who often add on extra features to their subscriptions.
Although both are trading at all-time highs, Shopify [NYSE: SHOP] shows more promise to continue to grow and has a larger customer base than Zendesk [NYSE: ZEN]. However, it’s essential to determine if SHOP is the right stock for you by evaluating your portfolio, considering your trading strategy and the investment goals you want to achieve.
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.