As Zuora’s stock has fallen over the past year, one analyst is giving the company a neutral rating.
Zuora provides companies with the tools to transform into a software as a service (SaaS) business model and build a subscriber base. It went public in 2018 and the stock peaked at almost $36 soon afterward. However, the stock has declined to a recent $14.29.
And while the company believes the global market is in the early stages of the “subscription economy,” Zuora recently cut its guidance for 2020 from $289-293.5 million to $268-278 million.
“Despite the huge market potential, Zuora has managed to slip up in two areas: poor sales execution and software integration,” wrote Steve Auger, a research analyst at Equity Analytx. “These problems and other headwinds have resulted in reduced guidance for this year.”
Zuora’s revenue grew by 31.6 percent for the most recent 12 months, down from 56 percent in 2018. Still, Auger believes “the company still has some pretty good revenue growth ahead of it. Zuora is below the trend line, suggesting that its forward sales multiple is lower than its peers’, given its estimated future revenue growth rate. My interpretation is that Zuora is undervalued relative to the average stock in my digital transformation universe.”
Zuora has been impacted by its unprofitable professional services segment, which accounts for 25 percent of its total revenue. These services include system integration, data migration, process enhancement and training. During its earnings call in May, the company explained that its troubles centered on two issues: delays in software integration of the two flagship products, billings and RevPro, and poor sales execution. In addition, Zuora experienced high early renewal activity in Q1 that will likely reduce billings growth in Q2, and moved to a new headquarters this year, with those related costs occurring in the second half of the year.
But as Auger points out, “the company fails the Rule of 40 and has significantly less gross margin than other SaaS companies, primarily due to the high level of professional services required to onboard customers. For these reasons, I am giving Zuora a neutral rating.”