After its Merger with Zoom is Terminated, Does Five9 Deserve a Place in Your Portfolio?

Leading cloud contact center software provider Five9, Inc. (FIVN) offers analytics, digital engagement, workforce optimization, workflow automation, and AI to enable its customers to reimagine their customer experience. FIVN slumped 2.9% over the past five days because its shareholders voted down a nearly $15 billion sale to Zoom Video Communications, Inc. (ZM) last week. Moreover, its shares have slumped 4.1% so far this year.

After the multibillion-dollar deal was announced in July, the U.S. Department of Justice reviewed the acquisition out of concern about potential foreign participation. FIVN’s stock is currently trading 26% below its 52-week high of $211.68. While FIVN would continue its partnership with ZM that was in place before the announcement and operate as a standalone company, the call center software firm’s stock is expected to remain volatile given the ongoing investigations related to its previously announced sale to ZM.

Here’s what could influence FIVN’s performance in the upcoming months:

Termination of Acquisition Deal

On September 30, FIVN shareholders aborted ZM’s $14.7 billion acquisition deal because of the virtual meeting giant's unwillingness to add cash to its bid. Since it was a stock swap, FIVN investors would have received a much smaller premium than the agreed-upon price. In addition, last month, a branch of the U.S. Department of Justice started reviewing ZM’s proposed all-stock acquisition deal to see if it "poses a risk to the national security or law enforcement interests." The cancellation of the multibillion-dollar acquisition and the concerns surrounding the scrutiny could spur further volatility in the stock price of FIVN.

Ongoing Investigations

Last month, Halper Sadeh LLP, Monteverde & Associates PC, WeissLaw LLP, and several other law firms started investigating potential breaches of fiduciary duty by FIVN’s board of directors and violations of the federal securities laws concerning its sale to ZM. Since these ongoing investigations can raise investors’ concerns about the stock, its share price could plummet further.

Bleak Financials

FIVN’s adjusted gross margin came in at 63.3% for the second quarter that ended June 30, 2021, compared to 65.7% for the second quarter of 2020. It reported an operating loss of $14.19 million, representing an increase of 72.5% year-over-year. The company’s net loss amounted to $16.53 million, compared to $16.05 million in the prior-year period. FIVN’s loss per share stood at $0.25 for the quarter. Moreover, FIVN’s net decrease in cash and cash equivalents totaled $45.17 million for the six months that ended June 30, 2021.

Its trailing-12-month EBITDA margin of 3.3% is 77.6% lower than the industry average of 14.7%. Moreover, its trailing-12-month asset turnover ratio of 0.5% is 24.9% lower than the industry average of 0.7%. In addition, the company’s ROTC, ROA, and ROE came in at negative 1%, 4.2%, and 22.8%, respectively.

Premium Valuation

In terms of forward non-GAAP P/E, FIVN is currently trading at 162.47x, which is 571.6% higher than the industry average of 24.19x. In addition, the stock’s forward EV/EBIT ratio of 157.62x is 710.2% higher than the industry average of 19.46x.

Also, FIVN’s trailing-12-month Price/Cash Flow and Price/Book multiples of 168.33 and 69.58, respectively, are significantly higher than the industry averages of 21.45 and 4.66. Furthermore, its forward Price/Sales ratio of 19.36x compares with the industry average of 4.07.

POWR Ratings Reflect Bleak Prospects

FIVN has an overall grade of D, which translates to a Sell rating in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary ratings system also evaluates each stock based on eight different categories. FIVN has a D grade for Quality. The stock’s negative ROE is in sync with this grade.

Also, it has a D grade for Value and Stability. The stock’s higher-than-industry Price/Sales ratio is consistent with the Value grade. Also, the stock’s higher volatility compared to its peers justifies the Stability grade.

In addition to the grades I’ve highlighted, one can check out additional grades for FIVN, including Sentiment, Momentum, and Growth here.

FIVN is ranked #122 out of 155 stocks in the D-rated Software – Application industry.

Click here to check out our Software Industry Report for 2021

Bottom Line

The termination of the merger agreement with ZM due to a failure to receive the requisite votes needed for approval at a FIVN shareholder meeting last week has recently caused the cloud contact center provider’s shares to drop. Moreover, the ongoing investigations against the company, coupled with its loft valuation, could cause the stock price to sink further in upcoming months. Therefore, the stock is best avoided now.

How Does Five9, Inc. (FIVN) Stack Up Against its Peers?

While FIVN has an overall grade of D, one might want to consider looking at its industry peers, Open Text Corporation (OTEX), Commvault Systems, Inc. (CVLT), and American Software, Inc. (AMSWA), which all have an overall grade of A (Strong Buy).

FIVN shares were trading at $154.10 per share on Tuesday afternoon, down $2.64 (-1.68%). Year-to-date, FIVN has declined -11.64%, versus a 17.36% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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