On Wednesday, Citi revised its stance on ZoomInfo Technologies (NASDAQ:ZI), lowering the price target from $11.00 to $7.00, while reaffirming a Sell rating on the shares. The adjustment follows what was described as an "outright ugly" second-quarter performance by the company, characterized by a significant miss, negative growth trends, an increase in write-offs and bad debt expenses, and the departure of the Chief Financial Officer.
The company's near-term outlook is expected to remain challenging, according to Citi. This is attributed to the continued high levels of write-off activity expected in the second half of the year, which is compounded by ongoing macroeconomic volatility and intensifying competition and pricing pressures. In response to these factors, Citi has revised its estimates downward and reduced its guidance for the fiscal year 2024.
The new price target of $7.00 reflects changes in the inputs to Citi's linear regression framework, used for valuation purposes. Despite acknowledging that ZoomInfo's valuation appears inexpensive—trading at 9.5 times its estimated 2025 enterprise value to free cash flow (EV/FCF) and at 8.2 times its price to earnings (P/E)—Citi anticipates that the stock may continue to underperform. This expectation is based on the projection of negative revenue growth and a shift in the company's business model towards more data-as-a-service as opposed to traditional software offerings.
Citi's stance is underpinned by concerns over the company's financial health and strategic positioning in a challenging economic environment, suggesting caution to investors regarding ZoomInfo's future performance.
In other recent news, ZoomInfo Technologies faced significant challenges in Q2 of 2024, resulting in a revision of its full-year financial guidance. The company reported a $33 million charge due to increased write-offs, primarily from small and medium-sized businesses (SMBs), impacting revenue and profitability. Operational changes have been implemented to minimize future write-offs, and ZoomInfo Copilot, the AI-powered offering, exceeded expectations with over $18 million in ACV.
The company's CFO, Cameron Hyzer, is transitioning out, with Graham O'Brien stepping in as interim CFO. ZoomInfo plans to reduce its real estate footprint significantly and stabilize its net revenue retention at 85%. Despite these developments, the company expressed confidence in its enterprise segment growth and its ability to generate strong free cash flow.
Analysts have updated the guidance for Q3 and the full year of 2024 to reflect the impact of Q2 charges. ZoomInfo aims to reduce credit risk in the SMB segment and shift sales efforts towards mid-market and enterprise customers. The company also plans to aggressively buy back shares, showcasing confidence in long-term value creation.
InvestingPro Insights
As investors digest the latest developments from ZoomInfo Technologies (NASDAQ:ZI), data from InvestingPro offers additional context that may be useful for evaluating the company's position. ZoomInfo's market capitalization stands at $3.2 billion, and it is currently trading at a high earnings multiple, with a P/E ratio of 233.61. Despite this, the company's gross profit margins remain impressive at 88.63% for the last twelve months as of Q2 2024, reflecting a strong ability to generate revenue above the cost of goods sold.
InvestingPro Tips highlight several factors that could influence investor sentiment. The management's aggressive share buyback initiative and high shareholder yield indicate a commitment to returning value to investors. Additionally, analysts expect net income growth this year, which could signal improving financial health. However, it's worth noting that the stock has experienced significant volatility, with a price total return of -56.75% over the last year, indicating potential risks.
For those considering an investment in ZoomInfo, the InvestingPro platform offers a broader range of tips, with 21 analysts having revised their earnings estimates downwards for the upcoming period, suggesting that investors should stay informed about the latest analyst views. The platform lists a total of 14 additional InvestingPro Tips for ZoomInfo, which can be found at https://www.investing.com/pro/ZI, providing a more comprehensive analysis for those seeking to make an informed decision.
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