Jefferies: 3 Software Players To Watch

Jefferies initiated coverage on three software technology companies earlier this month: Zendesk Inc. ZEN, ServiceNow Inc. NOW and HubSpot Inc. HUBS.

The Analyst

Samad Samana initiated coverage with a Buy rating for each company, with a price target of $82 for Zendesk, $182 for HubSpot and $240 for ServiceNow.

Zendesk

The company has become a leader in the $8-billion customer service applications software market, Samana said in the Oct. 1 initiation note. (See his track record here.)

“Zendesk is already one of the largest SaaS customer service software vendors, and we believe the large TAM should keep fueling its growth," the analyst said. 

In the last 18 months, the company has significantly improved its product strategy, which has impacted bookings and enterprise traction, Samana said. The launch of new products, enterprise versions of products and an upgraded go-to-market strategy has driven these changes, he said. 

“We believe the recent introduction of Zendesk Suite (2Q18) will be particularly impactful, as it changes the sales motion from cross-selling to upselling, which allows Zendesk to more easily monetize its non-support products while evidencing a demonstrable ROI to customers.”

Zendesk shares were down 1.28 percent at $65.80 at the close Friday. 

ServiceNow

ServiceNow is expected to notch new enterprise customer wins, in addition to land-and-expand strategies to supplement strong margin expansion, Samana said. The company’s large total addressable market supports long-term growth, he said. 

“Regardless of whether we measure the opportunity using enterprise spend, total customers or users, one thing seems clear: NOW has plenty of runway to sustain 30-percent or better subscription revenue growth. The company previously sized its TAM at $60 billion, which means it is about 4 percent penetrated.”

The company is known for IT service management, but emerging products related to customer service, HR, security and service delivery are growing quickly, the analyst said. 

ServiceNow shares were down 0.56 percent at $186.60 at the close Friday.

HubSpot

HubSpot is demonstrating durable growth and consistent margin expansion, Samana said.

“HubSpot has experienced rapid growth, with a revenue CAGR of 48 percent from 2014-2017. Subscription revenue grew at a 50-percent CAGR. We estimate that HubSpot will grow at a 29-percent CAGR from 2017-2020.”

The company recently introduced bundled suite pricing, which alters the sales motion from cross-selling to upselling, the analyst said.

“We estimate driving 100-percent adoption of the Growth Suite by single product customers would result in an incremental $180 million of annual subscription revenue. Even capturing 20 percent of this opportunity over the next 12 months could contribute meaningfully toward the $120-million increase required to hit Street estimates for 2019.”

HubSpot shares were up slightly at $145.83 at the close Friday. 

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