Zuora Stock: Extreme Selling Means Opportunity for a Potential Double

Embrace the Zuora Stock Sell-Off With a Long-Term View
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Embrace the Zuora Stock Sell-Off With a Long-Term View

There is some horrendous selling capitulation in the small-cap technology sector. The Russell 2000 is holding a bearish death cross pattern on its stock chart and may inevitably take a run at a bearish trend reversal.

But instead of joining the herd and running for the fire exits (this would be way too easy), it may be time to begin looking at some of the battered-down stocks.

Of course, there is ample risk that the stock market may ultimately move lower, but trying to call a bottom is not a science, and as long as you adopt a long-term perspective, you should be fine.

In the emerging cloud computing space, a small-cap play that has been kicked to the curb and left for the vultures is Zuora Inc (NYSE:ZUO).

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After ZUO stock had its initial public offering (IPO) at $20.00 in April, the price surged to $37.78. Since then, however, it has plummeted by 30% over the past month and is off 53% from its high.

I don’t believe that the selling in Zuora stock is warranted though. So, if you are a market vulture, this could be an aggressive scavenger opportunity.

Consider that Zuora is under the command of CEO Tien Tzuo, the former chief strategy officer at salesforce.com, inc. (NYSE:CRM). This gives me some comfort.

Zuora provides a real-time cloud subscription platform aimed at helping companies launch or improve their subscription model for products or services. The company counts over 900 clients worldwide.

On the chart, ZUO stock is currently navigating in a sideways channel with resistance at $21.00. A breakout could see Zuora target $25.00–$30.00 or even higher.

Chart courtesy of StockCharts.com

My Bull Case for ZUO Stock

Zuora has reported only three years of financial history, but based on what we have seen so far, the prospects look attractive.

Revenue grew 22.6% in fiscal-year 2017 (ended January 30) and then grew an impressive 48.6% million in fiscal-year 2018.

Fiscal Year

Revenue

Growth

2016

$92.2
2017 $113.0

22.6%

2018

$167.9

48.6%

(Source: “Zuora Inc. Cl A,” MarketWatch, last accessed December 7, 2018.)

But, as is generally the case, as the company’s revenue base accelerates, the growth rate will moderate.

Nonetheless, revenue is still expected to surge 36.4% to $229.0 million in fiscal-year 2019 and surge another 26.4% to $289.5 million in fiscal-year 2020. (Source: “Zuora, Inc. (ZUO),” Yahoo! Finance, last accessed December 7, 2018.)

These are numbers that many companies can only dream of.

And—not a surprise—Zuora is burning through cash and is still likely years away from being profitable. But that’s okay as long as the company’s revenue rises and its losses begin to narrow.

Fiscal Year

Generally Accepted Accounting Principles Diluted Earnings Per Share

2016

-$0.46
2017

-$0.37

2018

-$0.45

(Source: Marketwatch, op cit.)

On an adjusted basis, Zuora is expected to report a loss of $0.56 per diluted share in fiscal-year 2019 and a loss of $0.44 per diluted share in fiscal-year 2020. (Source: Yahoo! Finance, op cit.)

Armed with a strong balance sheet, Zuora will have the time and resources to get things right.

Analyst Take

The critical lock-up period for Zuora is over, so the market doesn’t have to worry too much about selling from insiders and pre-IPO investors. That’s despite the short sellers betting against ZUO stock to the tune of 4.1 million shorted shares, which is 23.4% of the float. (Source: Ibid.)

I’m not in the bearish camp; we have been seeing some short covering over the last month, which ultimately will support Zuora stock.