Five9 Inc. and Zoom Video Communications Inc. will go it alone after the software companies called off plans for a merger, but one analyst thinks the two software companies may rekindle their relationship in the future. Shares of Zoom
were up 3.1% in Friday afternoon trading while shares of Five9
were up 5.3% after the companies announced that they were terminating their all-stock deal. Zoom shares had declined sharply since the videoconferencing company made its offer for Five9, and Five9 shareholders voted against the deal amid Zoom’s rocky trading.
Needham analyst Scott Berg wrote that demand for contact-center solutions remains strong and that his conversations with industry players indicated that the Zoom merger activity hadn’t dampened Five9’s sales opportunities. “We believe the commentary suggests the company could be in line to report another 40%-plus revenue growth quarter for 3Q.” What’s more, Berg expects that Zoom and Five9 could strike a new merger deal down the line, a possibility that should act as a “backstop” for Five9’s shares, in his view. “While we believe all parties involved were disappointed in the ability to close the recent pricing gap, we believe the strategic rationale for Zoom to bring Five9’s leading Contact Center platform into its burgeoning [unified communications] platform is immense,” he wrote. Berg “would not be surprised” to see another buyout attempt from Zoom, though he notes that given Zoom’s interest in using equity capital for such a big deal, he “would not expect any subsequent attempt for several more quarters at a minimum once Zoom has its massive pandemic-fueled comps behind it in early 2022.” He rates Five9 shares with a buy rating and $200 price target. Evercore ISI analyst upgraded Peter Levine upgraded Five9’s stock to outperform from in-line following the announcement, and after speaking with Five9’s management team Thursday night. While he said that the company will be challenged to manage Wall Street expectations, executives’ stance was that “the business is firing on all cylinders, the pending acquisition was not a distraction, partner contributions remain strong, and the numbers released in the proxy are a fair representation of the current trends in the business.” He raised his price target on the stock to $205 from $185. As for Zoom, the videoconferencing company had viewed the Five9 purchase as a way to build out “contact center” services that would allow businesses to better communicate with customers, and analysts have some questions about the company’s next steps there while believing the company still has a strong future. Zoom highlighted in a blog post after the deal termination that it still has still has partnerships with Five9 and others and sees compelling opportunities in the contact-center market even without M&A. The company also plans to launch a video-engagement center (VEC) product next year as part of its own contact-center efforts, but this project comes with a bit more uncertainty. “A natively built contact center solution could face technology and go-to-market challenges, but could become a more formidable competitor to Five9 and others over time, though likely several years off,” wrote Baird analyst William Power. “Though we liked the Five9 combination, we believe Zoom remains well positioned for solid long-term growth,” Power wrote, while maintaining an outperform rating on Zoom’s stock and lowering his price target to $335 from $380. “We expect continued share gains in video and Zoom Phone remains very early.” Mizuho analyst Siti Panigrahi called the VEC “an early-stage solution not comparable to Five9’s offering,” though he expects that Zoom will make tuck-in acquisitions to grow the product, especially given the company’s cash positioning and a recent corporate-development hire. He has a buy rating and $350 price target on Zoom’s shares, which have declined 30% over the past three months Five9’s have fallen 8.8%. The S&P 500
is up 1.1% over a three-month span.