Zendesk Has Higher Attrition Risk, Lower New Sales, Wedbush Says In Downgrade

Zendesk Inc ZEN faces a heightened risk of attrition in its core segment that caters to small and medium businesses and is likely to witness a deceleration in closing new sales, according to Wedbush.

The Zendesk Analyst

Steve Koenig downgraded Zendesk from Outperform to Neutral and reduced the the price target from $97 to $72.

The Zendesk Thesis

Although Zendesk has been gradually transitioning to serve larger enterprises, most of its revenue still comes from providing support services to small- and mid-sized businesses, Koenig said in the Wednesday downgrade note. (See his track record here.)

Due to the shift, the company has reduced its sales efforts with small and medium businesses, the analyst said. Even if Zendesk is able to sell to more enterprises, it may face higher attrition than the more enterprise-focused companies in the space, he said. 

The company is scheduled to report first-quarter results April 30. Wedbush reduced its revenue and earnings estimates for the quarter from $243.2 million to $239.6 million and from 9 cents per share to 8 cents per share, respectively.

Given Zendesk’s operating and free cash flow margins exiting fiscal 2019 and likely demand disruption due to the pandemic, the company’s prospects do not support sustained upside in its shares over the next 12 months, Koenig said.

ZEN Price Action

Zendesk shares were trading 4.52% higher to $69.67 at the time of publication Wednesday.

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