Key Takeaways

Transitioning to upmarket focuses may slow revenue growth as SME decline reduces potential earnings, affecting revenue expectations.
Heavy investments in sales and product enhancements risk margin compression, impacting profitability despite growth efforts.
Strong upmarket growth and successful product innovation at ZoomInfo are expected to drive profitability, enhance earnings, and increase customer retention and engagement.

Catalysts

About ZoomInfo Technologies

Provides go-to-market intelligence and engagement platform for sales, marketing, operations, and recruiting professionals in the United States and internationally.What are the underlying business or industry changes driving this perspective?

The shift towards serving upmarket customers, although potentially profitable, might slow revenue growth as SMEs form a significant part of ZoomInfo's base and are declining, which could lead to lower-than-expected revenue growth.
There's a risk of net margin compression as the company invests heavily in expanding its sales force and enhancing product features for upmarket, which could diminish profitability.
The company's over-reliance on Copilot's success could impact net earnings, especially if the anticipated high adoption rates do not materialize, potentially resulting in slower top-line growth.
While Operations is fast-growing, the overall revenue growth may be affected by a slower-than-expected migration of existing customers to newer platforms like Copilot, which could dampen overall earnings growth rates.
The potential overestimating of AI-related benefits and uncertain immediate returns from AI investments could mean that net revenue retention won't achieve the desired increase, impacting overall profitability and earnings.

ZoomInfo Technologies Earnings and Revenue Growth

ZoomInfo Technologies Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

This narrative explores a more pessimistic perspective on ZoomInfo Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
The bearish analysts are assuming ZoomInfo Technologies's revenue will grow by 1.7% annually over the next 3 years.
The bearish analysts assume that profit margins will increase from 2.4% today to 11.8% in 3 years time.
The bearish analysts expect earnings to reach $150.3 million (and earnings per share of $0.41) by about May 2028, up from $29.1 million today. The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, down from 103.4x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 16.4x.
Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

ZoomInfo Technologies Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

ZoomInfo has demonstrated strong upmarket growth, with its enterprise and mid-market businesses growing, which is expected to drive profitability improvement and potentially boost future revenues and net margins.
The successful launch and uptake of their product, Copilot, has exceeded expectations, contributing $150 million in Annual Contract Value. This innovation could enhance earnings by increasing customer engagement and product adoption.
The company's operations segment, a fast-growing area, increased 27% year-over-year in Q4, indicating accelerating growth that could boost revenues.
Recent customer surveys show improved perceptions of ZoomInfo, with 99% of marketing and sales leaders stating their view of the company has improved or remained the same, which might bode well for customer retention and thus steady revenue streams.
ZoomInfo's aggressive moves to shift more upmarket, combined with product and service innovations, are expected to drive industry-leading profitability and expand free cash flow, thereby potentially increasing earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

The assumed bearish price target for ZoomInfo Technologies is $6.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of ZoomInfo Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $6.0.
In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $150.3 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 8.4%.
Given the current share price of $8.89, the bearish analyst price target of $6.0 is 48.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

Copilot And Upmarket Shift Will Shape A Cautious Future

Copilot And Upmarket Shift Will Shape A Cautious Future