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Zeta Global (ZETA): Buy, Sell, or Hold Post Q2 Earnings?
The past six months have been a windfall for Zeta Global’s shareholders. The company’s stock price has jumped 67%, hitting $29.90 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is it too late to buy ZETA? Find out in our full research report, it’s free.
Why Does ZETA Stock Spark Debate?
Powered by an AI engine that processes over one trillion consumer signals monthly, Zeta Global (NYSE:ZETA) operates a data-driven cloud platform that helps companies target, connect, and engage with consumers through personalized marketing across channels like email, social media, and video.
Two Positive Attributes:
1. Billings Surge, Boosting Cash On Hand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Zeta Global’s billings punched in at $439.2 million in Q2, and over the last four quarters, its year-on-year growth averaged 38.7%. This performance was fantastic, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth. 
2. Projected Revenue Growth Is Remarkable
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite, though some deceleration is natural as businesses become larger.
Over the next 12 months, sell-side analysts expect Zeta Global’s revenue to rise by 25.1%. While this projection is below its 38.2% annualized growth rate for the past two years, it is eye-popping and indicates the market is forecasting success for its products and services.
One Reason to Be Careful:
Low Gross Margin Reveals Weak Structural Profitability
For software companies like Zeta Global, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
Zeta Global’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 59.5% gross margin over the last year. Said differently, Zeta Global had to pay a chunky $40.52 to its service providers for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Zeta Global has seen gross margins decline by 0.9 percentage points over the last 2 years, which is poor compared to software peers.
Final Judgment
Zeta Global’s positive characteristics outweigh the negatives, and with the recent rally, the stock trades at 4× forward price-to-sales (or $29.90 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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