Insights

Why Zendesk Stock Plunged Today

What happened

Shares of customer-service software company Zendesk (NYSE: ZEN) plunged on Thursday after the management team announced the end of a strategic review. In short, the company is remaining independent whereas it appears the market had hoped an acquirer would step in. As of 10 a.m. ET, the stock was down 10%.

So what

For context, Zendesk’s stock had been outperforming the S&P 500 so far in 2022 in large part because investors thought the company would be acquired. There were even reports of multiple bids, which would in theory only increase the potential acquisition price.

Today’s announcement from management throws cold water on that fire and the stock is now underperforming the market for the year.

Regarding potential acquirers, Zendesk’s management ultimately said, “No actionable proposals were submitted, with the final bidders citing adverse market conditions and financing difficulties at the end of the process.” In other words, despite the company’s solicitations, no one wanted to buy Zendesk enough to make it happen. 

Now what

If private equity investors and other companies don’t want Zendesk, then why should retail investors? Keep in mind that retail investors can and should play a different game than other classes of investors. Some may be looking for the best chances of positive returns in the short term. But regular investors should be looking to buy companies with strong track records and hold through the market’s ups and downs.

Consider that Zendesk just recorded record revenue growth for the first quarter of 2022, is forecasting roughly 27% revenue growth for the full year, is free-cash-flow positive, and it has record remaining performance obligations (a strong indicator for future growth) of $1.4 billion. In other words, it’s not like Zendesk is a company in crisis. Therefore, I believe potential investors should take advantage of today’s drop to see if it’s a buying opportunity.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zendesk. The Motley Fool has a disclosure policy.

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