Yext: Still Not Giving Up

Summary

• Yext reported an in-line fourth quarter, causing the stock to take a minor tumble.
• The stock has failed to hold a sustained rally since going public amid other recent IPOs that have seen their stocks fly.
• Yext is still pursuing a largely greenfield market in location data.
• The company's shares are extremely appealing at 5x revenues, despite the less-than-stellar results this quarter.
• Amid a market where most high-growth companies trade at extremely expensive multiples, Yext presents a solid value/growth play.

In the market for high-growth software companies, an in-line quarter is essentially a miss. When you have companies like SailPoint (SAIL) and Twilio (TWLO) beating revenue estimates this quarter by huge margins of 8%, 10%, or more, investors are pretty much conditioned to see large top-line numbers that completely smash Wall Street's estimates.

Leading up to earnings, this is essentially how investors had positioned Yext (Yext), the small/mid-cap software company that specializes in helping businesses manage their location data and geographic footprint across the web. Expecting a beat to this quarter, investors bid up shares of Yext from the low $12s to the mid $13s over the past week, but were horribly surprised when Yext managed to eke out just an in-line quarter on the top line (EPS exceeded expectations by a small margin). As a result, Yext's shares have continued their usual pattern since IPO - up some, down some more.

YEXT data by YCharts

Yext is rare among software IPOs that went public last year in that its stock has failed to see any significant traction since going public. If you look at other companies that went public in the spring last year - Okta (OKTA), Alteryx (AYX), and Appian (APPN) being just a few examples - nearly all of them trade at around 2x their IPO price (or more, in Alteryx's case). Yext has barely moved beyond its $11 launch price.

And while it's true that Yext's IPO comps have had much more success in smashing quarterly earnings targets, I'd prefer to view Yext as a story that's still waiting to be discovered than as a bona fide laggard. After all, the space that it plays in, location data, is virtually untouched by the major software giants, and as data becomes a bigger and bigger agenda item on corporate strategy checklists, niche data players like Yext have a tremendous tailwind. I've been long on the company since last fall and have been waiting on the markets to find some enthusiasm for it.

Valuation significantly below peers

Checking in on Yext's valuation: in aftermarket trading since reporting earnings, Yext settled at $13.28 (down 2% from the day's close) - implying a market cap of just $1.21 billion. Then we subtract out $118.3 million of net cash on the company's balance sheet (Yext has no debt) to arrive at an enterprise value of $1.09 billion.

Along with the company's Q4 post, Yext also unveiled guidance for FY19 that implies strong growth. Its initial guidance range is $224-226 million, and the midpoint of $225 million implies 32% y/y growth over this year's revenue of $170.2 million. This isn't bad for a company that grew at 37% y/y this full year - Yext might not be seeing the 40/50% growth that comps like Okta are seeing, but its deceleration curve is also much more modest.

Using this $225 million as the denominator, Yext's current trading multiple implies a 4.86x EV/FY19 revenue multiple - about half the valuation of other peers. See how wide this gap is below:

YEXT EV to Revenues (Forward) data by YCharts

And yes, it's true that the numbers that Yext puts up quarter after quarter aren't exactly as exciting as Alteryx's or Okta's, but is it really worth a 4-5x gap in the revenue valuation? While the latter two are terrific companies, I'd argue Yext is the far more rational investment at this juncture.

The quarter was still a good one

And despite the whole mantra of an in-line quarter being a miss for high-growth software companies, Yext's results actually weren't bad. See the earnings summary below:

Figure 1. Yext Q4 results

Source: Yext Q4 earnings release

Revenues still grew 35% y/y (a slight deceleration from last quarter's 39%) to $48.0 million, in line with analyst expectations. The company is sparse on providing details on customer metrics, but it did mention that "expanded subscriptions" were a driver behind revenue growth in the quarter, indicating likely success of Yext's Winter Product Release in driving business.

The Winter Product Release, by the way, is one of the reasons I'm bullish on Yext. The company has incorporated a conversational AI into its management tool, allowing users to control the software via a text-based interface. This type of proprietary technology is valuable in its own right, let alone being a major driver for signing customers up.

The Yext Platform now also manages 29.1 million "attributes" (physical locations) on the platform, up 63% y/y - indicating the huge traction Yext has made over the past year. It's also worth noting (though this isn't new news) that Yext has a lot of Fortune 500 anchor clients with thousands of locations - including Marriott (MAR), T-Mobile (TMUS), and a host of retailers/restaurants/financial institutions with a wide geographic retail footprint.

Yext also managed to achieve a 4-point increase in its GAAP operating margin during the quarter. Its GAAP operating losses of -$17.5 million amounted to an operating margin of -36%, which isn't great, but is four points better than -40% in 4Q17. Scale has its benefits, and as Yext continues to grow and capitalize on efficiencies, it should see a clearer path toward breakeven.

The other positive headline for the quarter: Yext outpaced analyst consensus EPS estimates of -$0.12 by two cents, achieving -$0.10. It's true that the company is still far from achieving profitability and is relatively behind other high-growth software peers, but at Yext's current scale next to its market opportunity, profits shouldn't be the foremost thing on investors' minds.

Key takeaways

Yext is still a company that I'm stubbornly holding onto in my portfolio, though I do admit to a little disappointment with this quarter's in-line numbers. One thing is for certain: being an investor in Yext requires a lot more patience than being an investor in a high-flyer like Alteryx, which seems to only know how to go up.

But at the end of the day, I'm more comfortable holding a software stock at 5x revenues than I would be holding one at 10x and above. Especially as the market shrugs off February's corrections and returns to a high multiple - especially in the NASDAQ's tech stocks - I fear for multiples compression in the higher-valued end of the sector eating into returns.

Stay long on Yext. The near term may bring ups and downs, but the stock can be had for a bargain today and held for the long run for substantial gains.

Analyst’s Disclosure: I am/we are long YEXT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.