1. Five9, Inc. (NASDAQ:FIVN)
Number of Hedge Fund Investors in Q1 2024: 38
Analyst Average Share Price Target: $80.15
Upside: 83%
Five9, Inc. (NASDAQ:FIVN) is a cloud software provider that serves the needs of the call center industry. It provides a one stop solution for call center agents to use email, social media, and other platforms to communicate with customers. This makes Five9, Inc. (NASDAQ:FIVN) one of the few companies of its kind that is able to let call center companies off load their infrastructure costs to a third party and improve margins. However, a large portion of Five9, Inc. (NASDAQ:FIVN)’s customers are reliant on discretionary spending, and as the economy slows, the firm will find it difficult to sustain its recurring revenue growth. To counter this, Five9, Inc. (NASDAQ:FIVN) has to grow the share of enterprise customers within its revenue mix. Additionally, a key component of its hypothesis, which has also rattled investors and contributed to a modest 16% share price gain in 2023, is whether AI will disrupt call centers sufficiently to make Five9, Inc. (NASDAQ:FIVN)’s business redundant. The firm has responded to these concerns by deepening AI’s presence in its portfolio and offering products such as AI chatbots and allowing businesses to determine customer needs without relying on humans.
Brown Capital Management was aware of all these trends in its Q1 2024 investor letter. However, it remains bullish about Five9, Inc. (NASDAQ:FIVN) and shared:
Five9 is a leader in cloud-based contact center software, offering a comprehensive omnichannel solution that seamlessly incorporates inbound and outbound calling with email, chat, SMS and social media. With the growth of e-commerce, consumers are increasingly opting for digital interactions over physical visits, driving the need for world-class contact-center software solutions. These systems effectively become a virtual front door for customers, serving as indispensable, mission- critical gateways for customer engagement and support. Five9’s cloud-native platform is superior to traditional, on-premise legacy systems, offering lower costs, faster innovation and support for remote-working needs. These advantages are expected to significantly increase cloud adoption in the future, pushing it well above the current level of approximately 20%.
The company reported fourth quarter revenue results that were only modestly ahead of consensus expectations, with disappointing revenue-growth guidance for the first quarter of 2024. Management cited the macroeconomic impact of lower demand for services from the installed base, driven by headwinds within the consumer discretionary vertical, which is the company’s third-largest customer segment. In addition, there are ongoing concerns that new artificial intelligence (AI) technologies could disintermediate contact-center software and shrink the market for the company’s offering. However, AI also offers a significant opportunity for the company, a leader with eight currently marketed AI products that are providing a pricing uplift of as much as 2-3x. In addition, to fully leverage AI’s advantages, customers must first adopt cloud-based solutions, which should accelerate the shift to the cloud, benefiting Five9. The company has seen particularly strong adoption of AI solutions with larger enterprises, helping it expand beyond its earlier success with small and medium-sized customers. Despite the near-term headwinds, Five9 should have a healthy runway for durable double-digit long-term growth driven by industry-leading technology and market-share gains from legacy incumbents.
FIVN has some of the highest analyst percentage share price upside in cloud stocks. However, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AMZN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None.
