Yext Stock: Endless Bleeding Could Stop With Takeover Bid
For tech stocks, once the momentum wears off, it’s really hard to rekindle the spark. Such is the case with Yext (YEXT), a New York-based software startup that once looked very promising as a provider of a very niche and widely applicable technology. Fast forward a few years, and as Yext’s growth slowed amid continued losses, investors refused to be patient in this stock and consistently sold it.
The recent tech crisis has also not been good for Yext, even though it was cheap to begin with. The stock is now down 20% since the start of 2022, and it’s also down 60% in the past year. The question is: when does the bleeding stop?
I’ve always been bullish on Yext, praising the combination of its unique technology, steady if unimpressive growth, and deep value. While I admit my faith in the stock has often been misplaced, it’s hard to take an objective look at the stock right now and not see it as a buying opportunity.
Stocks that have fallen this far (Yext is now down 70% from highs above $25) can go in one of two directions: either drop to zero if at risk of bankruptcy, or rebound (usually due to a proposed acquisition) . When I look at Yext’s debt-free cash balances and relatively low cash burn, I find it hard to believe that this company, which is still managing a steady pace of growth, is headed for “crash and burn.”
I think, however, that with its current very low valuation, there are certainly bigger software companies out there window shopping (indeed, this is a time of consolidation in the tech sector where many assets in difficulty are either recovered or targeted for potential acquisition – recent examples include Activision Blizzard (ATVI), Peloton (PTON), among others).
At Yext’s current stock price of just above $8, the company trades at a market cap of just $1.01 billion, making it one of the smallest software stocks in the industry. listed company on the market. After deducting the considerable $229.5 million in cash from its balance sheet, the company’s bottom line the enterprise value is only $811 million.
Meanwhile, for the following fiscal year FY23 (the year ending for Yext in January 2023), Wall Street analysts expect the company to generate $444.7 million in revenue, a growth 14% year-on-year. Against this earnings estimate, Yext is trading at just 1.8x EV/FY23 revenue – again, one of the cheapest titles in the industry.
It is important for investors to remember the long-term bullish thesis of this stock, absent the recent bearish noise:
- The pandemic has highlighted the importance of location-specific data. The pandemic has of course had a disproportionate impact on physical Yext customers, whose outlets/branches were (and may still be) in lockdown mode. Longer term, however, I think the coronavirus has only served to underscore how critical Yext is to managing accurate, real-time location updates across the web, when different outlets are subject under different COVID-19 conditions. Having a way to push automated location updates through a platform like Yext is essential.
- The broad evolution of its platform significantly increases Yext’s available market. Yext started out as its location data platform, but over the past few years has evolved into a very versatile software company. Yext Answers and embedded AI search technologies are a very nascent opportunity. SEO tools/reviews and webpage builders are other complementary, but non-overlapping products. He also created a new tool called Extractive Question Answering, which can answer questions about long documents and other unstructured data elements.
- Led by the founder. These days, it’s increasingly common to hand over the reins of software startups to seasoned executives. Yext is however still led by its founder Howard Lerman, a successful series founder. His product expertise is well complemented by veteran CFO Steve Cakebread, who previously held the same position at none other than Salesforce.com (CRM).
- Low cash consumption. Again, most of the companies that have such pessimistic sentiment against them are those with large losses and insufficient cash to last more than a year. This is not the case with Yext. Although GAAP losses are still significant, the company’s cash hoard is more than enough to last for years of cash burn.
Don’t get me wrong here: Yext will take patience for the recovery, but I think for a stock that has fallen this deeply, the recovery will be quick once there is a catalyst to set it in motion. Recently, Yext released a better-than-expected third-quarter earnings report in December, and if that trend continues in its next earnings release in March, we could have the start of a recovery. Investors with strong bellies should take the opportunity to buy Yext on the cheap now.
Let’s now review Yext’s latest fiscal third quarter results, released in early December, to show the fact that Yext is not a sinking ship and is still producing decent results. The third quarter revenue summary is shown below:
Yext’s revenue grew at a 12% YoY pace to $99.5M, beating Wall Street expectations of $98.2M (+10% YoY) by a margin of two points. It’s also the second consecutive quarter of acceleration: in the second quarter, Yext grew at an 11% YoY pace; in the first quarter, growth was only 8% year-on-year. The company also broke the high end of its $1 million internal guidance range.
Management noted that they have seen several signs that “our listing activity is starting to pick up.” Listings, as long-time Yext investors know, are the core product that launched the company in the first place — and because many brick-and-mortar retail stores and restaurants have been hammered during the pandemic, this part of the Yext activity has been particularly hammered since the start of the lockdowns. At worst, Listings ARR (annualized recurring revenue) had fallen to -1% year-on-year; now ARR is back to 5% y/y growth. And in addition to strong renewal activity and expansion trends among existing customers, Yext also saw strong growth in Europe.
The Answers product, meanwhile, continues to be the future of Yext. This is the contextual search engine that Yext helps build into its customers’ websites. While the company did not identify an exact ARR growth rate for Answers, it did note that the product has seen triple-digit ARR growth of over >130% y/y since its introduction. The company’s total ARR increased 12% year-on-year to $387 million.
Here’s some additional anecdotal context on the quarter’s go-to-market progress from CEO Howard Lerman’s prepared remarks on the third quarter earnings release:
And so, for example, a large telecommunications company, we landed in the first quarter of fiscal year 2016 for just a few hundred thousand dollars in ARR grew over 11 times to an ARR base of over 3 million in the third quarter of this year by expanding our AR search platform with more products and solutions. With more products and solutions to sell and demand thanks to our customer recovery, sales productivity for ramp reps in our direct channels has increased by more than 50% year-to-date compared to last year. ‘last year.
Europe. Europe increased TAR by more than 30% year over year in the third quarter. Renewals. Renewals in financial services and healthcare have been strong this quarter, and we are starting to see some industries impacted by the return of the pandemic, such as retail, restaurants and luxury brands. Renewals this quarter include Dolce & Gabbana, Krispy Kreme, PF Chang’s, Topgolf; and fashion brand, YSL. Third quarter data suggests that we bottomed out in the fourth quarter of last year and are on track to get back to our pre-pandemic state.
We are optimistic about the future growth opportunities for our business due to these trends and also due to new growth factors as we continue to innovate. We’ve built a robust platform that allows us to innovate, quickly launch new research products into adjacent categories for cross-selling, and layer industry- or company-specific solutions based on their graph of knowledge.”
The other key point to make about Yext’s earnings is that, relatively speaking, its cash burn is low. Year-to-date through the third quarter, operating cash flow was -$7.3 million and free cash flow was -$19.6 million, versus cash burn -$23.7 million and -$77.6 million from the same period last year (although the prior year’s FCF compensation was heavily influenced by the construction of Yext’s new headquarters).
The key realization here, however, is that although Yext trades like a company heading towards zero, the company’s relatively modest cash burn compared to its cash balances of over $200 million ensures that Yext still has a long run before it needs to raise additional capital.
Key points to remember
Yext is trading at historically low valuations. While it’s true that the company isn’t as exciting as it was when it started, it still has a compelling and complementary product portfolio in listings and responses, with a return to income growth in mid-teens. Treat this as a buying opportunity.