Why Shares of Zuora Popped Today

What happened

Shares of cloud-based software provider Zuora (NYSE: ZUO) surged on Friday, closing up 10.5%. There was no company-specific news. Instead, the successful initial public offering of fellow cloud software specialist Avalara (NYSE: AVLR) seemed to be what drove the rally.

So what

Avalara, which sells tax compliance software, finished the day with its stock trading at $44.94, nearly double its IPO price of $24 per share. Avalara is growing fast, with revenue surging by 27% in 2017. But like most cloud software upstarts, it’s posting big losses.

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The impressive first-day performance from Avalara seems to be rubbing off on Zuora, which itself went public in April. Including Friday’s gain, shares of Zuora are up about 147% from the IPO pricing of $14 per share.

Zuora, a cloud-based subscription management platform provider, posted strong first-quarter results in May, with revenue growing by 60% year over year. The company is also losing money, but investors have been willing to bet that its rapid growth will eventually lead to profits.

Now what

With Avalara rocketing higher on its debut in the public markets, the appetite for subscription software companies appears insatiable. Zuora is now valued at roughly $3.8 billion, 17 times the high end of the company’s fiscal 2019 revenue guidance. Given that lofty valuation, Zuora will need to deliver continued rapid-fire growth to keep investors happy.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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