Yext: Deep Value

Summary

• Yext returns back to beating consensus targets.
• The stock trades at a lower P/S multiple than Alphabet despite targeted growth rates of nearly double the search giant.
• Yext should return to a multiple of 6x FY22 sales estimates of $485 million, or $25.
• This idea was discussed in more depth with members of my private investing community, DIY Value Investing. Get started today »

After another quarter of 28%+ growth, Yext (NYSE:YEXT) is limping along with a 6% gain in mid-day trading. The stock trades near the multi-year lows despite a history of strong growth around the 30% range. My investment thesis remains very bullish on investors eventually catching onto this bullish corporate story.

Image Source: Yext website

Moving Beyond Google

The biggest fear in the stock for the digital knowledge management company is the reliance on consumers using sites such as Google to obtain information about a company via Yext databases. The process still flowed through 3rd-party sites that could eventually find a solution to block Yext out of the process.

The recent product release of Answers helps to solve this problem. Consumers are now able to get corporate answers directly from a company's website to prevent potential customers from bouncing right back to Google to search for information on the brand that they couldn't find on their own website.

Per CEO Howard Lerman on the Q4 earnings call, Answers is off to a great start after launching at the end of Q3:

Now some people have said, "No one uses site search." But the number of searches we're seeing come through our platform is stunning. With only a limited set of early clients, Answers customers are already achieving an annualized run rate of more than 11 million searches per year. And remember, these queries are all commercial. It's a user or a consumer asking a business a question and getting a correct answer.

A new telecom customer just launched with an amazing pace of queries for Answers on a pace of over 5 million annual searches removed from the Google stream:

A large Fortune 500 telecommunications company was one of the latest customers live on Yext Answers. And on a Sunday, they saw more than 16,000 searches with more than 10,000 clicks, and annualized that would be more than 5 million searches and 3 million clicks.

The company reported FQ4 revenue growth of 28% and topped 31% for the year. The guidance for FY21 is for revenue growing 27% for the year. The key here is that a lot of the key components of the sales data support Yext generating faster growth this year.

• Quota-carrying sales reps grew to 250, up by 42%.
• Closed 236 deals > $100,000, up 40%
• Closed 25 deals > $1 million.
• Total customers hit 1,900, up 38%.
• ARR hit $326 million, up 29%.

Yext now has the pipeline primed for revenue growth in excess of 30% this year, while the stock isn't valued based on this growth level.

30% Grower

Whether Yext ends up with 27% revenue growth in FY21 or jumps above 30% growth based on my thesis, the stock shouldn't trade at yearly lows following the FQ4 report. Before reporting earnings, the stock traded down to $14 and was only about $1 above the yearly low just below $13.

The amazing part of this investment story is that Yext now trades at a discount to the much slower growing Alphabet (GOOG) (GOOGL) that dominates the internet search sector. While Alphabet has consistently traded in the range of 4x forward sales estimates for the last year, Yext has seen their multiple collapse by nearly half to only 3.6x sales.

Data by YCharts

With sales on target to approach 30% revenue growth, Yext should return to a multiple of 6x FY22 sales estimates of $485 million. The stock valuation jumps up to $2.9 billion, and the stock reaches $25 in such a scenario.

Takeaway

The key investor takeaway is that Yext is back on track after a disappointing FQ3 report in early December. The stock shouldn't trade at a lower P/S multiple of the slower growing Alphabet. Until this equation flips back into the rational levels of early 2019, Yext is an easy stock to hold for strong returns.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in YEXT over the next 72 hours. 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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Comments

[El Financeiro]

Thx.. good article. Long YEXT. In the age of misinformation and companies controlling the info on their brands, this has potential.

[Boboboomer]

The deeper you go the more problems you’ll find with Yext. They are irrelevant in the majority of internet users repertoire and the B2B “maps seo” junk proves how delusional this company is. Trying so hard to be anything at this point to make a buck or make it look like they are!

[mooch2run44]

Interesting.

[BeepBeepImAJeep3]

There's another peach by the "Bag" Holder. Nice comp of GOOGL. LOL.

I am tempted to short this just knowing you're long. Will add it to my short list, thanks for the tip.

[James James]

I hope you're right

[Kagami427]

I love Yext. Long.