Zeta Global Ups Forward Guidance (NYSE: ZETA)

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A quick overview of Zeta Global

Global Zeta (NYSE: ZETA) released its third quarter 2022 financial results on November 1, 2022, beating expected revenue and missing EPS estimates.

The company operates a programmatic marketing automation and consumer intelligence platform for advertisers worldwide.

Given the company’s growth trajectory, steadily increasing guidance, and updated valuation, my outlook on ZETA remains a BUY at around $7.90 per share.

Zeta Global Overview

Zeta, based in New York, NY, was founded to develop advanced online advertising capabilities that enable businesses to generate greater returns from their online marketing efforts.

Management is led by co-founder, president and CEO, David Steinberg, who has been with the company since and was previously founder and CEO of InPhonic, a wireless telephony and communications products company. .

The company’s main offerings include:

  • Opportunity Explorer

  • Identity graphic

  • Intent graph

  • agile intelligence

  • Apis

The company primarily pursues large-scale clients across all major industry verticals through a direct sales model.

Zeta Market and Competition

According to a market research note from eMarketer, the digital ad spend market was estimated at $153 billion in 2020 and is expected to reach $315 billion by 2025.

In 2020, despite the global pandemic, digital ad spend grew by 12.7%.

The note claims that 2021 saw significant growth in digital advertising after a slower-than-expected 2020, but future growth rates will decline through 2025.

The chart below shows the report’s predicted growth trajectory and percentage of digital ad spend to total, from 2020 to 2025:

U.S. digital ad spend

U.S. Digital Ad Spend (eMarketer)

Potential competitors include:

  • Google

  • Adobe

  • yahoo

  • Meta

  • Oracle

  • leatherette

  • Amazon

  • Criteo

Recent financial performance of Zeta

  • The total turnover per quarter increased according to the following graph:

Total revenue history

Total Revenue History (Seeking Alpha)

  • Gross profit per quarter also increased in a similar trajectory:

Gross profit history

Gross Profit History (Seeking Alpha)

  • Operating income per quarter has remained significantly negative in recent quarters:

Operating revenue history

Operating Revenue History (Seeking Alpha)

  • Earnings per share (diluted) also remained negative, as shown in the chart below:

Earnings per share

Earnings per share (seeking alpha)

(All data in the graphs above are in accordance with GAAP)

Over the past 12 months, ZETA’s stock price has fallen 20.2% compared to the US S&P 500 index decline of around 19.8%, as shown in the chart below :

52 week stock prices

52 week stock price (seeking alpha)

Valuation and other measures for Zeta Global

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]

Rising

Enterprise Value / Sales

3.19

Revenue growth rate

25.7%

Net profit margin

-52.4%

% EBITDA GAAP

-39.4%

Market capitalization

$1,690,000,000

Enterprise value

$1,760,000,000

Operating cash flow

$76,320,000

Earnings per share (fully diluted)

-$2.16

(Source – Alpha Research)

The Rule of 40 is a software industry rule of thumb that states that as long as the combined revenue growth rate and EBITDA percentage rate are equal to or greater than 40%, the company is on a trajectory acceptable growth/EBITDA.

ZETA’s last GAAP Rule 40 calculation was negative (13.6%) in Q3 2022, so the company needs significant improvement in this regard, according to the table below:

Rule of 40 – GAAP

Calculation

Recent Rev. Growth %

25.7%

% EBITDA GAAP

-39.4%

Total

-13.6%

(Source – Alpha Research)

Zeta Global Review

In its latest earnings call (Source – Seeking Alpha), covering third quarter 2022 results, management underscored its belief that “the market is getting even closer to Zeta’s sweet spot” because its platform was designed to improve the effectiveness of online marketing.

During the quarter, the company added 16 new customers at scale, a record for a quarter.

In terms of its financial results, revenue increased 32% year-over-year and adjusted EBITDA increased 40%.

The company’s Rule of 40 results were disappointing, with the most recent year-over-year figure down 13.6%.

Operating losses remain significantly high, although reduced sequentially. Earnings per share also remain strongly negative.

For the balance sheet, the company ended the quarter with cash and cash equivalents of $114.8 million and long-term debt of $183.9 million.

In the past twelve months, free cash flow was $56.5 million, but the company paid a whopping $301.8 million in stock-based compensation.

Looking ahead, management has again raised its full-year 2022 guidance to a revenue growth rate of 19% and adjusted EBITDA (excluding stock-based compensation) up 29% compared to 2021.

On the valuation side, the market values ​​ZETA at an EV/Sales multiple of around 3.2x.

The SaaS Capital Index of publicly held SaaS software companies showed an EV/Average Revenue multiple of approximately 6.9x on September 30, 2022, as shown in the chart here:

SaaS Capital Index

SaaS Capital Index (SaaS Capital)

Thus, by comparison, ZETA is currently priced by the market at a significant discount to the broader SaaS Capital Index, at least as of September 30, 2022.

The main risk to the company’s outlook is an increasingly likely macroeconomic slowdown or recession, which could accelerate discounts to new customers, produce slower sales cycles and reduce its revenue growth trajectory.

Another potential upside catalyst is the continued pressure on businesses to adapt their digital marketing strategies due to major platforms’ third-party cookie restrictions.

Given the company’s growth trajectory, steadily increasing guidance, and updated valuation, my outlook on ZETA remains a BUY at around $7.90 per share.

About Robert Wright

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