Salesforce.com (CRM) provides enterprise cloud computing solutions, with a focus on customer relationship management, to businesses and industries worldwide. Its solutions include sales force automation, customer service and support, marketing automation, digital commerce, community management, analytics and a cloud platform for building custom applications.
Zendesk, Inc. (ZEN) delivers software-as-a-service (SaaS) solutions to organizations. It provides a single customer service interface to organizations to manage all their one-on-one customer interactions. Its products are designed to incorporate and innovate based on customer feedback obtained through beta and Early Access Programs (EAPs).
Given the reliability of CRM solutions in remotely managing customer interactions, door delivery services and analysis of consumer behaviors, most businesses are likely to depend more on them to maintain hybrid working models even after the pandemic. The size of the global CRM market size is projected to hit $113.46 billion by 2027.
While CRM lost 6.4% over the past six months, ZEN surged 41.9%. In terms of their past year’s performance, ZEN’s 108% makes it a clear winner given CRM’s 48.6% gain. But, which of these stocks is a better pick now? Let’s find out.
In an announcement on April 21, Sonos, the world’s leading sound experience company, revealed that it is using CRM to transform its digital shopping capabilities and deliver more personalized customer experiences. After seeing a huge demand for its multi-room wireless home audio systems, Sonos was able to generate 84% year-over-year growth in its direct-to-consumer business last year using CRM’s platform.
On the same day, CRM introduced its New Service Cloud to support changing customer service expectations and provide connected, personalized customer service from anywhere on one digital engagement platform, thus supporting agents working from home.
Last month, CRM’s integration and API platform, MuleSoft, was selected by TAB Bank, to build its open banking strategy and grow an ecosystem of partners. MuleSoft has enabled TAB Bank to deliver services to its customers much faster than usual.
This month, IBEX Ltd. (IBEX), a leading global provider of CX technology & outsourcing solutions, partnered with ZEN. ZEN’s integration with Wave X, IBEX’s purpose-built technology platform, will enhance IBEX’s commitment to offering an innovative set of digital CX solutions for client performance across the customer engagement value chain.
And on February 1, ZEN unveiled its comprehensive messaging solution as part of its new Zendesk Suite. The new package combines all ZEN’s service capabilities into one complete offering that brings simplicity to the enterprise software space.
Recent Financial Results
CRM’s revenue for the fourth quarter, ended January 31, 2021, increased 19.9% year-over-year to $5.82 billion. Its revenue from the subscription and support segment came in at $5.48 billion, up 20% year-over-year. Its gross profit increased 19.7% year-over-year to $4.34 billion. Its non-GAAP income from operations was $1.01 billion, which represented a 36.6% year-over-year rise. CRM’s non-GAAP net income has increased 62% year-over-year to $975 million. And its non-GAAP EPS also increased 57.6% from the prior-year period to $1.04.
ZEN is scheduled to release its fiscal 2021 first quarter results on April 29, after the market closes. For the fourth quarter ended December 31,ZEN’s total revenue rose 23.3% year-over-year to $283.50 million. Its non-GAAP gross profit increased 27.6% year-over-year to $225.04 million. ZEN’s non-GAAP operating income came in at $18.50 million in the fourth quarter, up 58.9% from the year-ago period. Its non-GAAP net income increased 11.3% year-over-year to $13.11 million. And its non-GAAP EPS increased 10% year-over-year to $0.11.
Past and Expected Financial Performance
CRM’s revenue and leveraged free cash flow grew at CAGRs of 26.3% and 34.6%, respectively, over the past three years. The CAGR of the company’s tang book value has been 74.3% over the past three years.
Analysts expect CRM’s revenue to increase 21.5% in the current quarter (ending April 30, 2021), 21.7% in the current year and 18.7% next year. Its EPS is expected to grow 25.7% in the current quarter, but decline 30.3% in the current year, and then rise 21% next year. CRM’s EPS is expected to grow at a rate of 12.9% per annum over the next five years.
In comparison, ZEN’s revenue and leveraged free cash flow grew at CAGRs of 33.8% and 31.7%, respectively, over the past three years. The CAGR of the company’s tang book value has been negative over the past three years.
Analysts expect ZEN’s revenue to increase 28.8% in the quarter ending June 30, 2021, 26% in the current year and 24.8% next year. However, its EPS is expected to rise 7.1% in the current quarter, 36.5% in the current year and 47.9% next year. Furthermore, its EPS is expected to grow at a rate of 75% per annum over the next five years.
CRM’s trailing-12-month revenue is 20.6 times ZEN’s. CRM is also more profitable, with a 14.7% EBITDA margin versus ZEN’s negative value.
Also, CRM’s 10.8% ROE compares favorably with ZEN’s negative value.
In terms of forward non-GAAP P/E, ZEN is currently trading at 216.99x, 218.6% higher than CRM, which is currently trading at 68.10x. Also, in terms of forward EV/sales, ZEN’s 13.84x is 68.6% higher than CRM’s 8.21x. And CRM’s 27.62x forward EV/EBITDA is significantly lower than ZEN’s 127.17x.
Thus, CRM looks more affordable here.
While ZEN has an overall D rating, which translates to Sell in our proprietary POWR Ratings system, CRM has an overall B rating, which equates to a Buy. The POWR Ratings assesses stocks by 118 different factors, each with its own weighting.
Both CRM and ZEN have a C Momentum Grade due to their mixed price performance. CRM has a B grade for Sentiment, which is consistent with analysts’ expectations that its revenue and EPS will increase. But ZEN’s D grade for Sentiment reflects its relatively weak EPS and revenue growth expectations.
Also, in terms of Value Grade, CRM has been graded a C, given its marginally higher valuation with respect to its peers. In comparison, ZEN’s Value Grade of D signifies its overvaluation.
Of the 61 stocks in the Software – Business industry, CRM is ranked #12.
ZEN is ranked #81 of 119 stocks in the Software – Application industry.
Beyond what we’ve stated above, our POWR Ratings system has also rated both CRM and ZEN for Growth, Stability, and Quality. Get all CRM ratings here. Also, click here to see the additional POWR Ratings for ZEN.
We believe that CRM and ZEN are well-positioned to capitalize on the industry’s tailwinds given the expected demand for cloud services and the need to empower customer service management even in the post-pandemic world. However, CRM appears to be a better buy based on its higher profitability and lower valuation.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Software – Business industry and here for those in Software – Application industry.
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CRM shares were trading at $237.39 per share on Wednesday afternoon, up $3.18 (+1.36%). Year-to-date, CRM has gained 6.68%, versus a 12.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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