The past six months haven’t been great for Five9. It just made a new 52-week low of $15.70, and shareholders have lost 38.4% of their capital. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Five9, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Five9 Will Underperform?
Even though the stock has become cheaper, we're cautious about Five9. Here are three reasons why FIVN doesn't excite us and a stock we'd rather own.
1. Weak Billings Point to Soft Demand
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.
Five9’s billings came in at $303.1 million in Q4, and over the last four quarters, its year-on-year growth averaged 9.1%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
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.
Over the next 12 months, sell-side analysts expect Five9’s revenue to rise by 9.3%, a deceleration versus its 21.4% annualized growth for the past five years. This projection doesn't excite us and indicates its products and services will face some demand challenges.
3. Low Gross Margin Reveals Weak Structural Profitability
For software companies like Five9, 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.
Five9’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 55.2% gross margin over the last year. Said differently, Five9 had to pay a chunky $44.76 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. Five9 has seen gross margins improve by 2.8 percentage points over the last 2 year, which is very good in the software space.
Final Judgment
We see the value of companies addressing major business pain points, but in the case of Five9, we’re out. Following the recent decline, the stock trades at 1.1× forward price-to-sales (or $15.70 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
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