Description

This is a super simple idea. I've been tracking this name for a while and own some. The stock is up 24% after hours today post earnings. However, I don't think this is a worse idea as the quarter derisks the story to a great extent.

Zoominfo is a data company masquerading as a SaaS company. It spends hundreds of millions of dollars curating a huge database of business contact information, org charts, "sales intent data" and other things of that nature, making it available on subscription basis to aid salespeople. The ROI is huge as the data makes a sales person much more effective. Zoominfo has the best data in the industry and therefore charges premium prices. You can see their margins -- they are huge.

The stock has had a rocky few years. They grew huge during COVID. Then, sales massively decelerated. Something like 40% of revenues come from software sector, so the cost cuts resulted in significant seat shrinkage. On top of that, they've been losing SMB clients due to an array of copycats -- there's like 10 of them, the most powerful of which is Apollo.io -- that sell worse data for 50%++ discount to ZI. This resulted in account losses and negative ASP for SMBs, which has not been recovered via new account sales and enterprise deals on the higher end.

So all this sounds awful, but why do I like this idea?

I am attracted to it because I suspect there's a fundamental misunderstanding of the business.

Almost anyone that covers / owns this idea views it as a SaaS company. But Zoominfo is not a SaaS company -- it's a database company. In this vein, it has more in common with Equifax and Verisk than Salesforce.com or Hubspot.

If you view it as a database company, a few predictions come to the fore:

1) It's extremely difficult to attack a database company with inferior data. In fact it's almost impossible. Clients are almost always willing to pay for superior data, because the opportunity cost or absolute cost of having bad data far outweighs the cost of this data. Therefore, database companies rarely compete on price, but much rather compete on quality / analytics. Database companies are almost always oligopolies or monopolies with high margins.

2) Database companies almost never have hypergrowth. But they generate enormous FCFs and with moderate but steady growth, they trade for high multiples.

3) Database companies combine multiple types of data together to enable new functionalities / analytics / decisioning tools that they can charge more money for.

Zoominfo fits all 3. 

Most investors worry about the competitive front. The checks I have done though contradict this. ALL of the so called challenger companies are trapped in the SMB space and cannot penetrate the enterprise market. Although they claim data quality is improving (true) -- there is still a gap between them and Zoominfo -- and moreover, that gap will be increasingly difficult to close over time. With database companies, we know that even modest differences in data quality makes a huge difference to value proposition and commercial success. Loopnet vs CSGP is an example but not the only one. A modest difference in data quality results either in a dramatic lower price when you sell it, or a dramatically smaller market share. I believe this will happen here too. With zero evidence of penetrating enterprise, the challengers are trapped in a low ARPU, high churn, high CAC world and are all burning money. Apollo.io maybe has the best shot of challenging Zoominfo longer term, but even there they are far behind and I would bet on Zoominfo retaining most of its market share LT. Again, LT database businesses evolve into stable oligopolies at worst, NOT free for all SMB battlegrounds.

Zoominfo has a track record of combining different sorts of data together (salesOS, marketingOS) to create novel tools. This is also a well trodden path, and they are likely to succeed over time. The white space, for database businesses, are limited only by their knowledge of customers and their imagination, which is why these companies have a track record of steady growth even with full market penetration (e.g. bureaus, Verisk, IHS, etc)

If you believe the above 2 assertions, you should not focus on the optically "low-ish" topline. You should also not focus on the TAM figures and penetration figures, which some say is high. It simply does not matter for well run database companies. 

Zoominfo's fundamentals are near a bottom and the story is inflecting. You see it this quarter. New wins in non-tech verticals and enterprise are finally showing greenshoots for offsetting weakness in SMB and tech. Their fundamentals will lag that of the broader tech industry -- which makes sense as tech companies have been cutting heads, which resulted in an enormous profitability boost, but this hurt ZI. That process is nearer its end than beginning. Across the sector I see growth stabilizing and even accelerating. Spend will come back, and ZI will accelerate as well.

Fast forward 18 months from now, this is my prediction:

1) The competitive landscape will look more settled. The "disruptive threat" from copycats will fade.

2) ZI will be growth faster, and visibility on further growth will grow. This will settle investors.

3) ZI will have bought back an enormous stock in the interim, and there will be a solid story to tell about capital allocation...

4) ZI will trade for a much higher multiple than today, driven by all of the above

5) you win huge if there is a legit commercial story on the AI angle (which I think is plausible). I have my pet theory here about how the next leg of the AI trade moves to enterprise SaaS and away from cloud and hardware.... but that's something for another day. Suffice it to say ZI has a legit call option here.

I think you easily double your money in 3 years even if (5) does not play, with a reasonable bull case for a triple. I see ZI trading for the top end of Database company multiples in 3 years -- that is to say, easily 30x NTM PE. 

Catalyst

Growth needs to inflect.