Zuora's Growth, Profitability Are Priced In, Morgan Stanley Says In Neutral Initiation

Zuora Inc ZUO, an enterprise software company that designs SaaS applications, has a huge total addressable market opportunity as companies vie to take advantage of the recurring revenue model of the subscription economy, according to Morgan Stanley.

The Analyst

Analyst Stan Zlotsky initiated coverage of Zuora with an Equal-weight rating and $19 price target.

The Thesis

Zuora's cloud-based recurring billing platform has been successfully managing over $100 billion of subscription revenue and boasts about 970 global customers, Zlotsky said in a Monday note.

The analyst sees Zuora's TAM as more than $20 billion, with the current penetration at less than 1 percent. The estimate is conservative, as industry analysts are underestimating the magnitude of the greenfield opportunity, Zlotsky said. 

Zuora could sustain competitive differentiation versus traditional enterprise resource planning vendors in the near term, as the platform has been built to handle the "complex and dynamic nature" of subscription billing, the analyst said. 

Morgan Stanley forecast 20-percent revenue CAGR over the next 15-year time horizon for Zuora. Given his view that the company can take a large share of high-quality customers, Zlotsky said he sees plenty of room for operating margin expansion.

"However, with a heavier pro services component than SaaS peers, blended gross margins are likely to limit steady state operating margin potential." 

Zuora's valuation already reflects the possible growth potential and margin expansion, according to Morgan Stanley. 

The Price Action

Since its April 12 listing, shares of Zuora have lost 2.25 percent.

The stock was down 1.43 percent at $19.27 at the time of publciation Monday morning. 

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