ZoomInfo Technologies Inc. (ZI) is riding the tailwinds of the massive demand for data-driven insights and database solutions. Today’s FA Alpha Daily will investigate what rating agencies are missing with the Credit Cash Flow Prime.
Companies that offer valuable data insights combined with high-tech database solutions find themselves at a very important juncture.
In today’s economy, where businesses are powered by technology and insights based on data, these companies are in short supply.
It is no surprise then that ZoomInfo (ZI) is a cash flow generating machine. By operating effectively as an asset-light networking database solution business, they are faced with strong market demand.
They further demonstrate strength with low net debt of $800 million on a $16 billion market cap, and have no debt maturities for four years.
And yet, the company is rated as a high-yield name doomed to a 10% chance of going bankrupt in the next few years.
However, we can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (CCFP) to understand the company’s obligations matched against its cash and cash flows.
In the chart below, the stacked bars represent the firm’s obligations each year for the next seven years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).
As evidenced by the following chart, ZoomInfo has plenty of cash flow and cash on hand to cover all of its obligations going forward. While cash flows alone don’t cover its debt in 2026, the cash it will be building over the next few years will allow the company to handily pay it off by 2027.
This is why, due to its plentiful cash flows and cash on hand building to handle all obligations for the next five years, we have rated the company a much safer investment-grade XO rating.
Rating agencies seem to be getting caught up in seeing material debt load maturing in 2026, instead of evaluating if the company has the ability to pay it off. By looking at the data, we can see that ZoomInfo Technologies will continue to be in a healthy position for years to come.
It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.
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SUMMARY and ZoomInfo Technologies Inc. Tearsheet
As the Uniform Accounting tearsheet for ZoomInfo Technologies Inc. (ZI:USA) highlights, the Uniform P/E trades at 88.6x, which is above the global corporate average of 20.6x and its historical P/E of 57.8x.
High P/Es require high EPS growth to sustain them. In the case of ZoomInfo, the company has recently shown a 29% Uniform EPS growth.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, ZoomInfo’s Wall Street analyst-driven forecast is for an 11% decline in EPS and a 42% EPS growth in 2022 and 2023, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify ZoomInfo’s $35 stock price. These are often referred to as market embedded expectations.
The company is currently being valued as if Uniform earnings were to grow by 29% annually over the next three years. What Wall Street analysts expect for ZoomInfo’s earnings growth is below what the current stock market valuation requires in 2022 but above it in 2023.
Furthermore, the company’s earning power in 2021 is 14x the long-run corporate average. Moreover, cash flows and cash on hand are almost 2x its total obligations—including debt maturities and capex maintenance. Overall, this signals a low credit and dividend risk.
Lastly, ZoomInfo’s Uniform earnings growth is below its peer averages, but the company is trading above its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
This analysis of ZoomInfo Technologies Inc. (ZI) credit outlook is the same type of analysis that powers our macro research detailed in the FA Alpha Pulse.