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It was famed technologist and investor Marc Andreessen who, in 2011, coined the phrase "software is eating the world".

And boy, was he ever right! In just the 13 years since, we've seen software - led by mobile apps - force enormous disruption on some of the most massive industries in the world, including transportation (Uber and Tesla), movies and television (Netflix and other streaming services), music (Spotify and Apple Music), and of course communications (messaging and social media).

What an incredible trend to invest into. But what if I told you that it is already becoming clear what the next thing to "eat the world" is going to be? It probably isn't a big surprise - it's artificial intelligence, or "AI".

Some people may roll their eyes at this, but that's only because it is still a little early to see the impact. But, believe me, the impact is there. Sure, there are the rapidly improving, general purpose chatbot AIs, that can now replace web search and do lots of other tasks that were once time-consuming or required expertise. But, more to the point, AI is starting to perform a lot of business use-case work, built on learning models customized to particular companies or industries.

Case in point, take one of our more successful investments, ServiceNow (NOW). ServiceNow has integrated AI deeply into its service desk offerings, creating a hugely useful help agent that is specialized in tasks specific to the customer's organization. Or take Adobe (ADBE), which has embraced AI to make image or video editing far simpler for users.

The applications become almost endless, and today I want to introduce you to a company that is applying AI to help companies better target and execute their marketing efforts. The company is Zeta Global (ZETA). Let's take a look!

Zeta's Business

Zeta sells the Zeta Marketing Platform, ZMP, which is built on an identity graph with data points covering over 240 million adults in the U.S. The AI built into ZMP uses data from this graph to help customers do things like segment audiences in various ways (demographics, interests, behavior, etc.), determine the best marketing channels for reaching target audiences, personalize creatives for particular prospects, manage and track A/B ad testing, track the lifecycle of a prospective customer through the marketing funnel, and so on. Basically, it is an AI driven marketing tool to make your employees far more productive and successful in their tasks.

Zeta primarily earns revenue through subscription fees. Roughly 75% of total sales come from subscriptions to the ZMP software and data solutions.

Another 15-20% comes from professional services, primarily consulting on, or implementation/customization of, ZMP deployments.

Finally, the last 5-10% of sales are from performance-baed fees, generally for event-based work. For example, a customer might pay Zeta for help to run something like a Super Bowl ad, or an ad campaign during the Olympics, or ad placement during a political campaign, etc.

Zeta has well over 1,000 clients, but notably it has 475 customers spending over $100k annually ("scaled" customers), and 144 over $1 million ("super-scaled"). The platform is also used in a wide variety of industry verticals. The largest is Consumer/Retail at 17%, but there are 9 different verticals that account for 5% or more of Zeta's revenue.

Revenue Growth and Recurrence

Growth has not been an issue. Zeta's 5-year CAGR is 24%. 2024 has been a banner year, with both a presidential election and the Olympic Games, leading to sales growth exceeding 35%. The company has guided to be over $1 billion in sales for 2025, and analysts in general expect 20% or higher revenue growth annually over the next 5 years.

Certainly I see no reason to doubt this. The platform, as shown, is generally useful across a wide array of gigantic industries (marketing is a core function of any business). Management estimates a total addressable market of $36 billion dollars, with double-digit annual growth rates. Zeta is on the vanguard of the "next big thing" in marketing automation. Ongoing growth is not a big concern, in my opinion.

With a SaaS model that already accounts for 75% of sales, and is likely to grow going forward, we're already looking at a majority recurring revenue model. Clients pay Zeta month after month, year after year to use ZMP.

Zeta passes the revenue growth and recurrence test just fine, so let's move on.

Is There A Moat?

Like most enterprise software, there are switching costs involved with integrating something like ZMP into a core business function like marketing. Once systems are integrated and employees begin to rely on it to do their daily work, taking it out or switching to a competitor becomes a giant hassle, only undertaken when the rewards are substantial.

This is especially true when the clients using it are large, bureaucratic organizations that may not be all that cost sensitive. Fortunately, that's the case here, as the bulk of Zeta's revenue are from large clients. We can see both retention and organic growth in the net revenue retention figure, which regularly comes in the 110-115% range. This means few clients leave, and most spend more on the platform year-to-year.

There is strong competition. IBM, Salesforce, and Adobe are all striving to provide AI solutions built on top of their core CRM and/or marketing systems. Potential clients that have already deeply integrated other offerings from these giants may lean in those directions instead. Zeta will have to work hard to win new business, however, the company is considered one of the strongest offerings in the space, ranking as a "Leader" in the most recent Forrester rankings.

Overall, while I don't feel there is a wide, unbreakable moat here, I do feel that switching costs provide ample protection against any rapid loss of sales. I'm satisfied that Zeta offers us at least some competitive protections.

Management and Financials

Zeta Global was founded in 2007 by David Steinberg and former Apple/Pepsi CEO John Sculley. Today, Steinberg remains as the CEO and Chairman, with a substantial 13% economic stake in the company (Sculley is still on the board). At 55 years old, Steinberg should have at least another decade or so of steering the ship, should he so desire.

He's done a good job growing Zeta from nothing into a leader in AI-driven marketing automation solutions. Since going public in 2021, the firm has roughly doubled both its sales and its share price. Zeta has operated in a cash positive position, with cash flow margins improving from just 2.6% in 2019 to close to 9% today. The balance sheet is in good shape with cash covering debt by over 3 times.

I don't have any notable concerns about management or the financials.

Risks

The reason Zeta's stock price is in the lower part of its 52-week range is a short seller report back in November from Culper Research. In it, Culper levies various allegations around Zeta's revenue recognition processes, as well as questioning the legality (and ethical questions) about how it acquires customer data.

This report cut the stock in half, from $38 down to about where it trades today just over $17. That makes ZETA, for now, a "battleground" stock.

Generally, I don't like investing in these, but a few things lead me to believe it is more of a short-term risk than a long-term one. For one, Zeta responded quickly and strongly to the allegations. Two, I looked into the history of Culper Research, and - to put it mildly - their past short attacks were neither successful nor corroborated - this looks like a low-quality short outfit. They even got Zeta's auditor wrong! (Zeta uses Deloitte, a "Big 4" auditor).

Still, it is certainly a risk that more short sellers may try to pile on. So be aware of that.

Evolving privacy laws, particularly in "progressive" regions like Europe or California, could limit the company's ability to build out or utilize their customer data information.

There is strong competition from some very large players, many of whom already have a foothold in the large companies Zeta is trying to expand into.

And finally, the financial model isn't fully mature. My fair value calculation assumes Zeta can reach a level of cash flow profitability it has not achieved as of yet. If it can't get there, the fair value target may be too optimistic.

Conclusion

Zeta hits the marks on all the key characteristics we're looking for. The company is growing rapidly in an expanding industry, its revenue sources are overwhelmingly recurring, is a leader in the industry and has meaningful switching costs, and continues to be founder-run. There are risks, including acute ones like the Culper short attack, to be aware of, but they seem manageable to me and do not look like long-term business impairments.

So, what is a good price? I've modeled for about 23% annual sales growth over the next 5 years, with a 20% free cash margin target, and pretty substantial share dilution. All of this is discounted by a high 11.5% discount rate. The target price comes out to be $24.50 per share. With the Culper report cutting the stock well below that, I think now is a good time to buy! I'm adding Zeta Global to the Buy List today!

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