One Diamond in the Rough Set to Soar

Stan Druckenmiller once commented that, and we’ll paraphrase, his job was to find the 50 stocks among 5,000 that had good-looking charts and fundamentals. It turns out to be harder than it seems at first glance to uncover those diamonds in the rough. Usually when a stock is beaten down to lower share prices and technically unattractive it’s because of weakening fundamentals. Then again sometimes the fundamentals look good but some other factor is driving a weak technical outlook. So, the challenge is daunting but not impossible and one that seems to check the boxes now is ZoomInfo (NASDAQ:ZI).

If you’re not already familiar with ZoomInfo, which incidentally happens to be held by Druckenmiller as part of his Duquesne Family Office portfolio, it is a tool aimed at sales people around the world that uses AI and advanced analytics to generate actionable insights. ZoomInfo collects information on over 100 million business professionals and 15 million companies. It then facilitates lead generation and prospecting in the B2B space. 

Where the platform shines and has won fast adoption is the easy way it connects to CRMs like Salesforce and marketing automation platforms like Hubspot. Customers have lots more to look forward to also. It also incorporates generative AI capabilities that offer predictive analytics to identify leads most likely to convert.

So the ZoomInfo platform is a winner among customers but what about the stock for shareholders?

Will ZoomInfo Stock Bounce Back?

ZoomInfo share price tumbled after a recent earnings selloff. But looking into the numbers a little deeper they didn’t disappoint on either the top or bottom lines. Earnings surprised to the upside by 26% while revenues came in slightly above consensus forecasts. 

Yet the share price has now dipped to a rising support level that began in August, suggesting that if the $10.30 level can be respected, ZI share price might well bounce back. A strong reason to believe in its potential to rebound can be found in the financial statements. In six of the past eight quarters, ZoomInfo has posted free cash flows of nearly $100 million, give or take. And when you extrapolate over time and run a discounted cash flow forecast as we did that puts fair value somewhere in the $17-$18 per share range.

If those estimates are close to being accurate it suggests that ZoomInfo has close to 70% upside opportunity now for new investors, and perhaps that’s why Stan Druckenmiller took a position. Interestingly, Stan appears quite a bit under water on his position, suggesting that when he purchased in or around the $14 per share range, he believed substantial upside existed even from the level. If so, the $17 target may in fact be too conservative.

Why Did ZoomInfo Stock Go Down?

Given the bullish valuation, it’s natural to wonder why the stock is being overlooked by the market. One factor is that free cash flow dipped in the most recent quarter to just $600,000 from $115 million the prior quarter. Another is that revenue slid on a year-over-year basis for the first time in a very long time. Management reported revenues of $303.6 million, down 3.3% year-over-year. To put that in perspective, it’s only the second slide into the red on a year-over-year basis in the past five years. And since the other one occurred in the prior quarter, it seems Wall Street analysts are concerned that a trend of negative growth may be starting. Those concerns may well be valid given that management lowered revenue forecasts in the prior quarter.

Nonetheless, at some point a stock becomes attractive when most, if not all, of the negative news has been priced in. And that seems to be the case now with ZoomInfo hitting key technical support levels and presenting a bullish valuation opportunity. For the patient investor, a wait-and-see approach may be best until evidence of a tide turn appears. For the more aggressive investor, it’s quite possible the reward to risk ratio now won’t get much more attractive.