Zuora ZUO shares have appreciated 11% in the trailing 12 months, underperforming the broader Zacks Computer & Technology sector’s return of 38.5% and the Zacks Internet Software industry’s appreciation of 40.7%.

ZUO shares have been facing macroeconomic challenges that have resulted in longer sales cycles and fewer transformational deals. Annual Recurring Revenue (ARR) growth and Dollar-based Retention Rate (DBRR) have been negatively impacted by higher customer churn.

However, it has been benefiting from an expanding enterprise clientele, which includes the likes of Toast TOST, and offers strong expansion opportunities. Robust demand for its Zephr solution, software suite that manages connected services and telematics for commercial fleets, has been a key catalyst. 

This has helped ZUO outperform its industry peers, including Five9 FIVN and Tuya TUYA, over the same timeframe. FIVN and TUYA shares have declined 52.7% and 11.5%, respectively.

Will these factors continue to push the shares higher? Let’s dig deep to find out.

One Year Performance

Image Source: Zacks Investment Research

Expanding Clientele to Aid Zuora’s Top Line

Zuora benefits from an expanding clientele driven by strong demand for the Zephr solution. It saw a number of multi-year renewals in the first quarter of fiscal 2025 and its customer base reached 451 with an Annual Contract Value (ACV) at or above $250,000, up 15% year over year. This cohort represents 84% of ZUO’s ARR.

Zuora won two deals with ACV of more than $500,000 in the first quarter of fiscal 2025. It saw year-over-year growth in cross-selling of products. It is also helping companies to expand internationally. 

Total Remaining Performance Obligation (RPO) improved 15% year over year to $581 million. This offers strong visibility to future revenue growth prospects. Non-current RPO increased 23% year over year to $256 million.

The acquisition of Togai is expected to drive top-line growth. Togai offers metering and rating solutions, and the buyout is expected to help ZUO offer a total monetization software stack.

ZUO Offers Positive Guidance

For 2024, Zuora expects revenues between $455.5 million and $461.5 million. It expects growth to accelerate in the second half of the year, with subscription revenues between $410 million and $414 million.

It maintained guidance for DBRR of 104% to 106% and ARR growth between 8% and 10%.

Zuora raised operating income range ($80-$82 million) including the operating expense impact of Togai acquisition.

Non-GAAP earnings are expected between 56 cents per share and 58 cents per share for the full year.

For 2024, Zuora expects free cash flow to be $80 million or more.

Zuora expects second-quarter 2024 revenues between $111.5 million and $113.5 million, with subscription revenues in the $101-$102 million range.

Non-GAAP operating income is expected in the $17.5 to $19.5 million range. Non-GAAP earnings are expected between 9 cents and 10 cents per share.

ZUO’s Earnings Estimates Trending Upward

The Zacks Consensus Estimate for 2024 revenues is pegged at $458.5 million, indicating year-over-year growth of 6.22%. The consensus mark for earnings is pegged at 56 cents per share, up 33.3% over the past 60 days and indicating 69.7% year-over-year growth.

The Zacks Consensus Estimate for second-quarter 2024 revenues is pegged at $116 million, indicating year-over-year growth of 5.6%. The consensus mark for earnings is pegged at 12 cents per share, up a couple of cents over the past 60 days, indicating 33.3% year-over-year growth.

ZUO’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 84.29%.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

ZUO Shares Trade at a Premium

We point out that Zuora stock is not so cheap, as the Value Score of D suggests a stretched valuation at this moment.

In terms of the trailing 12-month Price/Sales ratio, ZUO is trading at 2.89X, higher than its median of 2.77X and the industry’s 2.77X.

Price/Sales Ratio (TTM)

Image Source: Zacks Investment Research

ZUO shares are trading above the 50-day moving average, indicating a bullish trend.

ZUO Shares Trade Above 50-day SMA

Image Source: Zacks Investment Research

Conclusion

We believe Zuora’s expanding clientele and growing cross-selling opportunities offer a strong investment opportunity for growth-oriented investors. Given the strong growth prospect, its premium valuation is justified.

Zuora currently sports a Zacks Rank #1 (Strong Buy) and has a Growth Style Score of A, a favorable combination that offers a strong investment opportunity, per the Zacks Proprietary methodology. You can see the complete list of today’s Zacks #1 Rank stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Five9, Inc. (FIVN) : Free Stock Analysis Report

Zuora, Inc. (ZUO) : Free Stock Analysis Report

Tuya Inc. Sponsored ADR (TUYA) : Free Stock Analysis Report

Toast, Inc. (TOST) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research