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Elevator Pitch
I rate Five9, Inc. (NASDAQ:FIVN) shares as a Buy. I previously wrote about the AI tailwinds for FIVN in my July 19, 2023 initiation article.
Five9 recently participated in the Wells Fargo (WFC) TMT Summit and UBS (UBS) Global Technology Conference on November 28, 2023, and November 29, 2023, respectively. The positive takeaways from these latest investor events have prompted me to turn bullish on FIVN.
Five9’s offerings are priced at roughly one-tenth of what it will cost to hire a human call agent. There is a huge number of contact center agencies that haven’t migrated to the cloud, and the take-up rate for FIVN’s AI applications is reasonably good. Therefore, I have raised my rating for Five9 from a Hold to a Buy.
Human Call Agents Cost 10 Times As Much As FIVN’s Cloud Solutions
One key metric explains why cloud software solutions will continue to gain traction in the contact center market.
At the Wells Fargo TMT Summit on November 28, Five9 highlighted that companies need to spend roughly “$2,000 per month” to employ a human call agent, which is about 10 times FIVN’s monthly pricing on a per-seat basis for its basic contact center cloud software services package.
In this uncertain economic environment, it is natural that there is a greater focus on cost optimization initiatives. As such, it makes a lot of sense to adopt contact center cloud software solutions. Notably, Five9 had mentioned at its earlier Q3 2023 earnings briefing on November 2 that “companies are enthusiastically pursuing digital transformation initiatives to enhance customer experience” and “cut costs.”
More importantly, significant expense savings for its clients don’t come at the expense of weak profitability for FIVN. As a reference, Five9’s non-GAAP adjusted gross profit margin and net profit margin were pretty solid at 60.6% and 16.5%, respectively for Q3 2023.
13 Million Contact Center Agencies Haven’t Migrated To The Cloud
FIVN has significant growth potential, considering the huge proportion of contact center agencies that are still operating on-premise.
The company noted at the November 28 Wells Fargo investor event that “there’s 16 million agents out there” with approximately “13 million” contact center agencies “left to go to the cloud.”
As a comparison, Five9 disclosed at its FY 2022 results call in February this year that the company only had around 440,000 seats, even though it is a leading player in the contact center cloud services space. In other words, FIVN’s seat count merely accounted for 3% of the 13 million contact center agencies that haven’t migrated to the cloud.
The numbers presented above imply that the market’s expectations of a strong FY 2024-2027 revenue CAGR of +26.1% (source: S&P Capital IQ) for FIVN appear to be realistic.
Take-Up Rate Of AI Applications Is High
FIVN revealed at the latest UBS Global Technology Conference on November 29, 2023, that about 80% of customer accounts with Annual Recurring Revenue above a million dollars took up at least one AI application. According to the company, the high take-up rate for AI applications translated into a +10%-20% increase in per-seat pricing on average.
At the most recent UBS investor conference, Five9 emphasized that the statistic outlined above suggests that a significant number of customers are “purchasing Five9 (solutions) for the first time” as a result of “the AI story and the AI solutions” offered by the company.
In my July 19 write-up, I shared my opinion that “Five9 has substantial room for price hikes” with the introduction of new “AI-powered products” to the market. Therefore, I find it encouraging that the take-up rate for FIVN’s new AI applications is pretty healthy, which is expected to drive higher pricing and profit margin expansion.
As per S&P Capital IQ’s consensus data, the analysts project that Five9’s EBITDA margin might potentially increase by +400 basis points from 18.0% for FY 2022 to 22.0% in FY 2027.
Share Price And Valuations
FIVN’s shares have corrected by -13.3% (source: Seeking Alpha price data) following the publication of my initiation article on July 19, versus a marginal +0.05% gain for the S&P 500 in the same time period. This implies that a more attractive entry point for Five9’s stock has emerged as compared to a few months ago.
The market currently values Five9 at 5.60 times (source: S&P Capital IQ data) consensus forward the next twelve months Enterprise Value-to-Revenue, which is at a +27% premium to its peer NICE Ltd.’s (NICE) Enterprise Value-to-Revenue multiple of 4.42. But NICE’s consensus FY 2024-2027 top line CAGR is just +13.8% as per S&P Capital IQ data, which is slightly more than half of FIVN’s sales CAGR of +26.1% for the same time frame.
Five9 deserves to trade a higher valuation multiple. FIVN’s top line is expected to grow much faster than that of NICE, but Five9’s valuation premium over NICE isn’t as significant.
Final Thoughts
I am impressed by the insights shared by FIVN’s management team at the latest investor conferences. Five9’s value proposition (in terms of potential expense savings) is compelling, and there are positive expectations of top-line expansion and margin improvement for the company in the years ahead. This explains why I have a Buy rating for Five9 now.
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