Over the past six months, ZoomInfo’s stock price fell to $9.95. Shareholders have lost 9.9% of their capital, which is disappointing considering the S&P 500 has climbed by 12.6%. This may have investors wondering how to approach the situation.

Is there a buying opportunity in ZoomInfo, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Despite the more favorable entry price, we don't have much confidence in ZoomInfo. Here are three reasons why you should be careful with ZI and a stock we'd rather own.

Why Is ZoomInfo Not Exciting?

Founded in 2007 as DiscoveryOrg and renamed after a merger in 2019, ZoomInfo (NASDAQ:ZI) is a software as a service product that provides sales departments with access to a database of prospective clients.

1. Billings Hit a Plateau

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Over the last year, ZoomInfo failed to grow its billings, which came in at $282.4 million in the latest quarter. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation.

2. Customer Churn Hurts Long-Term Outlook

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

ZoomInfo’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 85.5% in Q3. This means ZoomInfo’s revenue would’ve decreased by 14.5% over the last 12 months if it didn’t win any new customers.

ZoomInfo’s already poor net retention rate has been dropping over the last year, warning us that its customers are churning and that its products might not live up to expectations.

3. Operating Margin Falling

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Analyzing the trend in its profitability, ZoomInfo’s operating margin decreased by 8.5 percentage points over the last year. Even though its historical margin is high, shareholders will want to see ZoomInfo become more profitable in the future. Its operating margin for the trailing 12 months was 11.2%.

Final Judgment

ZoomInfo’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 3.1× forward price-to-sales (or $9.95 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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