ZoomInfo: A Premium Price For Decelerating Growth Rates (NASDAQ:ZI)

Investment Thesis

ZoomInfo Technologies Inc. (NASDAQ:ZI) provides solutions to help organizations with their sales and marketing efforts.

ZoomInfo puts together all types of company and key personnel data, creating detailed profiles of individuals and businesses. They pride themselves on having up-to-date clean contact information on professionals and companies, allowing sales and marketing people to reach out to potential leads. Essentially, a convenient business-to-business platform.

The issue I have is that aside from an alluring narrative, ZoomInfo Technologies Inc. stock already carries a premium valuation, while its growth rates appear to be decelerating.

All in all, I’ll stick to the sidelines.

Rapid Recap

ZoomInfo Technologies is a technology platform that empowers sellers and recruiters to reach the entities that make sales happen.

In my previous analysis, I said,

It appears that as of late, ZoomInfo’s net retention figures have been moving lower.

Recall, a high retention rate means that you don’t have a lot of churn.

And more importantly, you are able to upsell to your existing customer base. Put in other words, if you have a net retention rate of say 10%, that would mean that all else equal, you’d have 10% growth rates next year, without having to spend more to acquire another single customer. Clearly, you want a high retention rate. But you don’t want it too high, where you are crushing your customer base with rising bills, and they end up exiting your platform.

That being said, even though ZoomInfo doesn’t typically report its retention rates each quarter, ZoomInfo did acknowledge that in Q1 net retention activity was incrementally worse than what they had experienced in Q4.

With that in mind, let’s discuss ZoomInfo’s financials.

Revenue Growth Rates Moderate

What you see above is a company whose revenue growth rates have fizzled out. Indeed, it’s difficult to imagine that this time last year ZoomInfo was growing at more than 50% CAGR.

With this in mind, allow me to ask you this perhaps uncomfortable question.

Do these revenue forecasts correspond with those of a rapidly growing company? And if not, can we make the case that ZoomInfo should carry a premium multiple? I don’t believe that is a reasonable conclusion. But more on that soon. Before that, let’s get to the next section, where we discuss ZoomInfo’s profitability profile.

ZoomInfo’s Cash Flows Are In High Demand

In the first instance, let’s discuss ZoomInfo’s balance sheet. ZoomInfo holds about $700 million of net debt. While in practical terms, ZoomInfo’s balance sheet is a reasonably leveraged balance sheet, it’s not prohibitively restrictive.

However, what this does mean, is that the ability for ZoomInfo to deploy significant capital toward share repurchases is encumbered, at least in the near term.

Even though ZoomInfo did repurchase $25 million worth of stock in Q1 2023, I can’t imagine there will be significantly more buybacks coming. What makes me say so?

I believe that ZoomInfo will seek to reinvest aggressively back into its business, rather than repurchasing shares. Basically, ZoomInfo will seek to attempt to reignite its growth rates, rather than buy back its shares. But more importantly, I believe that ZoomInfo will probably seek to pay down $600 million of its term loan that becomes due in 2026.

My ultimate contention is this, ZoomInfo’s cash balance is in high demand, and I don’t envision ZoomInfo returning to repurchasing shares any time soon.

To sum up my thesis, what we see above is that in the past 3 months, the multiple that investors have been willing to pay for ZoomInfo has expanded by nearly 30% from a forward P/Sales of 6 to a P/Sales of 8 – and yet, I can’t see much justification for this expansion.

The Bottom Line

ZoomInfo Technologies Inc. offers sales and marketing solutions by providing comprehensive business and personnel data.

However, despite its appealing narrative, the stock already carries a premium valuation, while its growth rates are slowing down. As a result, I remain cautious and prefer to stay on the sidelines. ZoomInfo’s net retention rates have declined, and its revenue growth has moderated from the previous year’s high levels.

Additionally, the company’s balance sheet carries a considerable amount of net debt, limiting its ability to allocate capital for share buybacks. Given these factors and the expanding valuation multiple, I find it challenging to justify the current market sentiment towards ZoomInfo Technologies Inc. stock.