Yahoo Finance Buy Zendesk, Hold Shopify?
We pitted Shopify (NYSE: SHOP) against Zendesk (NYSE: ZEN) over the weekend. I sided with Shopify as the better investment at this point, but at least one Wall Street pro disagrees. Jefferies analyst Samad Samana initiated coverage of Shopify and Zendesk on Monday afternoon, but he's only tapping Zendesk with a bullish buy rating. He sees Shopify as a hold.
Samana sees Zendesk as a category leader in the $8 billion online customer service market. He feels that Zendesk will continue to grow its top line at a 30% rate or better through the next few years, topping $1 billion in revenue. This is a pretty big deal for a company that generated just $430.5 million in revenue last year.
Image source: Shopify.
In the other corner
Shopify should hit $1 billion in trailing revenue by the end of this year -- two years earlier than Zendesk -- but this isn't a race to 10 figures for two companies serving entirely different online needs. The reason Samana is recommending Zendesk over the e-commerce platform provider is that Zendesk's enterprise value of $7 billion is less than half of Shopify at nearly $16 billion.
His neutral hold rating on Shopify isn't devastating. He sees the strong fundamentals intact here with the pieces in place for healthy growth through the next several years. The problem for Samana is valuation with Shopify's stock nearly quadrupling since the start of last year. Zendesk is no shrinking violet, having more than tripled in that time, but he still sees it as the better value.
Samana's $82 price target on Zendesk suggests 18% upside off Monday's close. His $175 price goal on Shopify is just 7% higher than where the stock is now.
Both companies are crushing their dot-com specialties. Zendesk's revenue rose 39% in its latest quarter. It sees revenue growth slowing to 32% to 35% in the third quarter, but that's no reason to think that it won't live up to Samana's goal of top-line gains north of 30% through at least 2020. Shopify's revenue growth is also decelerating, but it's climbing faster with its 62% pop in revenue last time out.
Zendesk and Shopify keep blowing the market away on the bottom line, a perfect combined 8-for-8 over the past four quarters in terms of landing ahead of Wall Street profit targets. I'm still sticking with Shopify as the better buy, but there's plenty to like in both stocks outside of the hefty valuations for both parties. In the end, this isn't a race. Both of them can lose, but ideally both of them will win.
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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify. The Motley Fool recommends Zendesk. The Motley Fool has a disclosure policy.
