Zenvia Stock: Too Cheap To Ignore (NASDAQ:ZENV)

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Close Up Of Woman Messaging Friends Using Smartphone

Tom Werner/DigitalVision via Getty Images

Investment Thesis

Zenvia (NASDAQ:ZENV) is a communication software company that went public last year with the backing of CPaaS (communications platform as a service) leader Twilio (TWLO). The company’s share price initially shot up over 80% from $10.2 to $18.5 within two months but started plummeting since then. Shares are now trading at $2.63, down over 80% from the all-time high last year.

Zenvia is a Brazil-based CPaaS company founded back in 2004. It provides communication services to LATAM (Latin America) companies through multiple channels such as messaging, SMS, WhatsApp, RCS, and more. CPaaS is a fast-growing industry as companies are seeking more efficient ways to communicate and interact with their customers. Zenvia is also expanding beyond CPaaS into areas like CX (customer experience) through multiple acquisitions.

The company is showing strong top-line growth thanks to the industry tailwinds and ongoing digital transformation in LATAM. Its valuation is also very attractive after the significant drop in share price. Chinese tech giant Tencent (OTCPK:TCEHY) is also taking advantage of the compressed share price and acquired 10.3% of Zenvia’s Class A common shares in the market earlier this year, which translates to a 4.3% stake of total common shares. I believe this can be seen as a strong vote of confidence from Tencent. Therefore I rate Zenvia as a buy at the current price.

Zenvia - value offering

Zenvia

Market Opportunity

CPaaS is currently one of the fastest-growing industries and has a huge TAM (total addressable market). The pandemic accelerated the pace of digital transformation and a lot of services are now moving online. Companies are now spending more on digital channels to interact and communicate with their customers. Gartner predicts that by 2025, 95% of companies will leverage CPaaS platforms to improve operational efficiency and customer experience digitally. According to Juniper Research, CPaaS sales will exceed $10 billion this year and are forecasted to increase to $34 billion by 2026. The industry is growing even quicker in LATAM as more people are now having access to mobile and the internet. This is evident with Neo-banks like Nu Holdings and e-commerce companies like MercadoLibre gaining popularity quickly. I believe the CPaaS industry will continue to grow as we are still in the early days of digital transformation, especially in the LATAM region. This will provide a huge market for the company to grow.

Acquisitions

Zenvia has been very active on the M&A end. It aims to become a unified end-to-end CX SaaS platform rather than a pure CPaaS company therefore it decided to expand into the CX area too. It acquired three companies last year which are D1, Sensedata, and Movidesk. These acquisitions allows the company to offer a much more comprehensive platform and work with customers throughout the whole communication life cycle.

Sensedata is a customer success management platform. It enables businesses to create communication actions and specific customer journeys. By tracking and aggregating data from different providers, its solution enables automated customized actions in different touchpoints of the customer journey, creating more personalized and seamless experiences. Movidesk is one of the best customer service and service desk software in Brazil. It is an end-to-end support platform that defines workflows, provides integration with communication channels, and monitors tickets through dashboards and reports. Besides the improvement in product breadth and capability, these acquisitions will also provide multiple cross-selling opportunities.

Cassio Bobsin, CEO, on Movidesk acquisition:

“Movidesk’s acquisition will be very synergistic and fully aligned with our value offer. It takes us from enabling communications and conversations to now enabling complete journeys for our clients’ end-consumers through multiple channels along their relationship cycle. By centralizing customer channels, automating processes, and generating productivity for the team, Movidesk brings support intelligence and metrics to ZENVIA’s communication platform and delivers an end-to-end customer journey,”

Zenvia M&A integration

Zenvia

Financials and Valuation

Zenvia announced its first-quarter result in May and it is showing impressive growth rates (the currency shown here is Brazilian Real). The company reported a revenue of $197.6 million, a 61% increase YoY (year over year) from $122.7 million. Excluding acquisitions, the organic growth rate is 36%. Gross profit increased by 100% YoY from $33.4 million to $66.8 million. The increase is driven by the huge expansion in gross profit margin, which is up 650 basis points from 27.3% to 33.8% this quarter. Their land and expand strategy is working very well. Active customers increased 21% YoY from 10,190 to 12,400 and the net revenue expansion rate is 122%, representing a 130 basis points increase from 109%.

Profitability remains weak but it is seeing some improvements. Net loss for the quarter was $(21) million compared to $(28.5) million, representing a 26.2% improvement YoY. Operating cash flow was negative $(16.4) million compared to negative $(43.8) million a year ago, representing a 62.5% improvement. The company’s balance sheet remains very strong, with $82.2 million in cash and only $42.2 million in debt. This leaves them enough liquidity to get through the cash burn phase.

Cassio Bobsin, CEO, on Profitability:

As we promised during our IPO, we continue to expand our profitability. Adjusted gross profit doubled when we compare Q1 ’22 to Q1 ’21 with the adjusted gross margin expanding 6.5 percentage points to almost 34%. As you can see in the chart to the right, almost 80% of our adjusted gross profit in the quarter already comes from Beyond SMS Termination, which is a direct result of our diversification strategy and recent acquisitions to become a SaaS company. In the first quarter alone, we have already achieved one-third of our adjusted gross profit earning the entire ’21 year in absolute terms.

Zenvia gross profit and margins

Zenvia

After the massive drop in share price, Zenvia is now trading at a very compelling valuation. I am using the P/S ratio here to value the company as it still has no earnings and positive cash flow. Zenvia is currently trading at an fwd P/S ratio of 0.5x, which is significantly lower than most of its peers. From the first chart, you can see that Zenvia is the cheapest when compared to similar companies like Twilio, Vonage (VG), Bandwidth (BAND), and Zendesk (ZEN). Twilio is currently trading at a whopping 700% premium compared to Zenvia. The average fwd P/S ratio of the group above is 3.37x, or a 674% premium. I don’t believe the valuation gap should be this huge as Zenvia is still growing quickly. In the second chart, you can see that Zenvia is actually growing the fastest among the bunch at 68.1%. Profitability may be an issue for now the company is already showing some improvements in net loss and cash flow. I believe Zenvia should be trading near the group’s average fwd P/S ratio which translates to a massive upside from the current price (a valuation expansion to the group’s average fwd P/S ratio will result in a 674% increase in share price).

Zenvia vs peers PS ratio
Data by YCharts
Zenvia vs peers revenue
Data by YCharts

Macro Risks

The current uncertainty regarding the macro environment may post multiple headwinds on Zenvia going forward. As the inflation rate persists and consumer purchasing power decreases, the economy is deteriorating quickly. We are already seeing signs of slowdown with companies like Target (TGT), Snap (SNAP) cutting guidance, and companies like Coinbase (COIN) and Tesla (TSLA) laying off employees. The slowdown in business activity will hurt Zenvia’s revenue as its revenue is volume-based. Being a LATAM company also poses further risks as LATAM countries are much more vulnerable compared to more developed countries like the US and Europe. The current inflation rate and unemployment rate in Argentina are 60.7% and 11.7% respectively. Much worse when compared to US’s 8.6% and 3.6%. Currency and Politics are also other risks investors should be aware of as Zenvia is based in Brazil and receives all its revenue in Brazilian Real rather than the US dollar.

Conclusion

In conclusion, I believe Zenvia has a massive opportunity ahead of them. The CPaaS industry has a huge TAM and is growing rapidly. The growth is likely to continue as digital transformation accelerates. The growth rate is even faster in the LATAM region where digital transformation is still in its early innings. The company’s expansion into the CX space will also open up new market opportunities. Its acquisition is transforming the company into a unified end-to-end CX SaaS platform with comprehensive capabilities. The company’s success is reflected in its financials with revenue increasing by 61%. It is also expanding its margins significantly while improving profitability at the same time. Despite growing quickly, Zenvia is still trading at a very compressed valuation when compared to its peers. While it is likely to face some headwinds in the near future, the valuation gap is still too big in my opinion. Therefore I believe Zenvia is a buy at the current price and a valuation expansion should be justified.



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