3 Catalysts for Zeta Global's Growth

Anand Chokkavelu: Welcome latest Motley Fool Scoreboard. I'm Anand Chokkavelu. We've got longtime fools. Travis Hoium and Toby Bordelon giving a 1-10 rating to a top 200 stock in the primary Hidden Gems database. It's ZETA Global. Ticker symbol Z-E-T-A, right the strength of ZETA's business first, including factors like industry and competition. Travis is excited for it. He's at an eight. Toby's at a solid seven. Toby Bordelon: Yeah, ZETA is a marketing tech company. I guess is the most succinct way to describe it. The software and data that companies can use to find capture retained customers, that sort of thing. Their tech helps with targeted ads and marketing campaigns across multiple channels out there. It does have its strengths. Marketing dollars are shifting towards AI driven applications. ZETA does that very well. Business growth hasn't been strong, average revenue per user expanding. It feels very crowded, though, and ZETA competes against a lot of strong players with a lot of resources there. There was a short seller report a couple years ago that hurt them a bit. They seem to have mostly moved forward from that near as I can tell. Travis Hoium: But yeah, I think this is one of the more attractive companies on the market today. If you want to look at why is the trade desk stocks plummeting, it's because companies like ZETA are taking that business. I think GAAP is actually one of the examples. Moved its entire business to ZETA Global. Their real advantage is the data that they have, and they say that their data is really only rivaled by some of the big tech companies, so like alphabet and meta. You combine ZETA's proprietary data with the data that you have as a big advertiser, and they typically just work with those really big companies, the GAAPS, the Nikes of the world that are spending hundreds of millions, billions of dollars on advertising. They don't kind of deal with the smaller fries. But you combine those two things, and that's where they get their advantage. They also have an AI platform called Athena that was launched recently where the people who are working with this can just talk to it. Hey, I'm looking for some customers to sell this kind of shoes. Where should I be advertising, and Athena will pull that out for you. I love where they're at right now that is backed up with their financials, they have the opportunity to go down market and actually work with smaller companies and also move into business intelligence. This is something that management is starting to talk about. When you have your hooks in a business, when you have this proprietary data, you have the AI tools to put on top of it, that's interesting optionality for the business long term. Anand Chokkavelu: Stock management. A 10 is Warren Buffett, a one is Homer Simpson. Travis is at an eight, Toby you're at a six. Toby Bordelon: Yeah, look, fun facts here. One of the co founders was former Apple CEO John Sculley. The one that everyone kind of forgets about because his tenure was. Anand Chokkavelu: For good reasons. Toby Bordelon: Apple. Yeah. Another co founder, David Steinberg, he's still there. He's CEO and Chair, doing a good job. I think management's fine. Nothing really stands out to me is why I went low here. Stock based comp is pretty high too. I don't love that. But that's this type of business. I think there are still some lingering questions for me about that short seller report, although I get that most people have probably moved beyond that right now. But the trust just isn't super high for me when I look at the scene. Travis Hoium: Yeah, I went much higher. Steinberg is one of those people that either comes off as a genius or a used car salesperson depending on how you want to interpret him if you like a interviews, and if you're interested in this company, I would encourage you to listen to some of those interviews because he can be kind of a polarizing person. But what I would say is that they have, since I've been following the company over the past couple of years, they have just consistently delivered. They set bars that they continue to beat quarter after quarter. I think they have something like 19 consecutive beat and raise quarters. They just continue to do exactly what they say that they're going to do. If you're looking at management teams, that's all we can judge them on long term. Also, I love the fact that Steinberg is one of those co founders, because that just gives you a little bit more cachet when things need to change at a company, you need to change directions, you need to go all in on this product called Athena. That's maybe a little bit harder to do if you're from the outside. Anand Chokkavelu: Financials a 10 is a fortress, a one is the Yikes. Travis is a nine, Toby, you're the Serving. Toby Bordelon: Yeah, financials are nice here. Balance sheet is fine. [inaudible] growing very well. On the top line, it looks good. Revenue margins expanding rapidly. I like to see that. I hit them a little bit because we're just recently GAAP positive here, and the company still has a ways to go to me to prove they can be sustainably profitable. Management is guiding for GAAP profitability for the full year, but it's just barely there, so we'll see if they hit that. Travis Hoium: Yeah, ZETA Global grew 50% in the most recent quarter. If that's nice, I will take nice all day as an investor. I love that from Toby. But look, I think things are absolutely heading in the right direction. With a company like this, you're going to want to look for that revenue growth if they're able to grow, 25% plus. I don't think 50% is probably sustainable long term. They're able to grow at this really high growth rate. I'm less worried about margins. They'll be able to turn those margins on later. We're also having a lot of these AI tools where they're kind of not quite pricing that in yet. They're not charging for something like Athena yet, extra. It's just kind of an added service, so they're eating a bit of those AI costs. I think there's plenty of opportunity to increase those margins and that profitability later on. Much more worried about revenue growth, and that is absolutely phenomenal right now. Anand Chokkavelu: All right, Travis, let's move on to valuation. How will ZETA Global stock do over the next five years and how safe is it? Ten is a sure thing, one's lottery ticket. Travis Hoium: I think this is going to be an absolute market crushing stock, I said, 15% plus. I love the growth. I love the optionality to expand the business. It's also a relatively small company. It's less than a $5 billion market cap, and the valuation is pretty compelling when you look at those growth metrics. The enterprise value to sales is just 3.3 right now. We did Caterpillar yesterday. Their enterprise value to sales is double they're growing about 5%. Here's a company that is growing at a 25% compound annual growth rate over the past three years. I think that could be even higher over the next three. Love the valuation. It's not the safest stock because there is a lot of competition in this space. A company like the Trade Desk could come back, so there's maybe some ebbs and flows there, but right now I love the risk reward. Toby Bordelon: Yeah, I want 10%-15%, a little less optimistic, but I'm guessing we do see market being returns over the next five years here. Safe score is five for me. It's one of those high growth companies that's at risk if the growth if they stumble on the growth aspect, right. If they can keep it up, we'll be fine. But there's risk there. I think, overall, it's probably a reasonably fair price to pay for the growth we're seeing, if you go in understanding that if suddenly that were to come down, you're going to get a hit on the stock. Anand Chokkavelu: Thanks to both Toby and to Travis, they've given ZETA Global a strong overall score of 7.4 out of 10, with safety being the lone fly in the ointment. For a top it, Toby prefers the trade desk for more potential reward despite admitted risk. Travis doesn't have a top, but he implores you not to buy the trade desk. Clearly, this is one we're going to have to revisit soon. I think last time we did it, it got a score above eight. Look out for a new scoreboard every market day at 7:00 P.M. Eastern. Next up is Axon. Till then, Fool on.