Yext: Value Stock For A Bear Market

Summary

• Shares of Yext have fallen roughly 20% since the start of the market pullback, despite having little exposure to the economic fallout from the coronavirus.
• Yext's most recent quarterly results showed an acceleration in billings, suggesting a strong FY21 ahead.
• The company's Yext Answers product, which adds search bar functionality to clients' websites, is a huge driver of revenue upside.
• Yext is a deep bargain at ~3.5x forward revenues.

To the extent that the current market pullback was caused by fears of the coronavirus, it was also prompted by overheating in most stocks across the market. Valuation multiples had run extremely hot, especially in the tech sector - so at the first sight that not everything was perfect, stocks fell quite hard.

Unfortunately, the broad-based pullback has also hit stocks that are neither deeply impacted by the coronavirus nor too expensive to begin with, especially Yext (NYSE:YEXT). The New York-based software company, whose technology helps companies manage their location data across the internet, has fallen about 20% since the start of the pullback, despite a strong showing in the fourth quarter of fiscal 2020 that points to another strong year ahead.

Data by YCharts

And in market turmoil, my investment strategy remains largely unchanged: buy high-quality growth businesses at an even more reasonable price. And despite the recent roller coaster, Yext remains a core mainstay in my portfolio. The bullish thesis for Yext, in my view, rests on the following factors:

• Growth driven by a unique product. Yext is still rightly considered a high-growth stock, with revenue growth clocking in at just under 30% y/y. Unlike many of its peers in the SaaS sector, very few companies are focused on what Yext is doing, giving it thought leadership in its space and very little competition.
• High recurring revenue, high margin business. Yext derives a stable base of recurring revenues from its customers, which it generally charges by location (so as franchises like Wendy's (WEN) expands its footprint and uses Yext to manage those locations, Yext's billings grows). Yext also generates strong ~75% gross margins, giving it strong opportunities for operating leverage.
• New products driving wider TAM. Yext is ramping up Yext Answers, which management believes extends Yext's TAM by $10 billion (double its original TAM of $10 billion).
• Deep value. We'll discuss Yext's valuation in detail shortly, but Yext is currently one of the cheapest stocks in the software sector, despite its obvious fundamental strengths.
• M&A potential. With such a low valuation, it's not implausible that acquirers are window shopping for Yext. Especially with the company's deep integration with Google Maps (GOOG) (GOOGL), it wouldn't be out of the blue to see Google acquire Yext to augment its nascent cloud division.

At present share prices just under $14, Yext trades at a market cap of $1.61 billion. After netting out the $256.1 million of cash on its balance sheet, Yext has an enterprise value of $1.35 billion. Here's how that stacks up against Yext's most recent guidance for FY21:

Figure 1. Yext FY21 guidance update

Source: Yext 4Q20 earnings release

Yext is projecting revenue of $378-$382 million for next year, which represents a growth range of 27-28% y/y. Against this revenue outlook, Yext trades at a valuation of just 3.5x EV/FY21 revenues. Compare that against several other SaaS stocks at a ~30% growth range:

Data by YCharts

Even with the broad multiples compression across the software sector as of late, Yext's spread to its peers remains wide. As recently as last year, when Yext was trading in the low $20s, the company managed to earn a valuation multiple above 7x forward revenues. My price target for Yext by year-end is $22, representing 6x EV/FY21 revenues and 57% upside from current levels.

Q4 download

Let's now look at Yext's fourth-quarter results in greater detail. The company's earnings summary is shown below:

Figure 2. Yext 4Q20 results

Source: Yext 4Q20 earnings release

It's important to recognize that Yext's fourth-quarter results represented a beat to Wall Street's expectations, and at the time of the earnings release, shares jumped nearly 10% (though the stock has retraced virtually all of these gains and more since the market pullback). Revenues grew 27% y/y to $81.4 million, beating Yext's guidance range from last quarter of 24-27% y/y, as well as Wall Street's mark of $80.3 million (+26% y/y).

Perhaps more important, however, is the fact that Yext greatly improved its billings performance this quarter. The company's deferred revenue balance grew 30% y/y to $176.8 million, while calculated billings also grew 30% y/y. We also highlight the fact that as of the end of the fourth quarter, Yext's ARR stood at $326 million, up 29% y/y. This also means that in Yext's revenue outlook of $378-$382 million for the coming year, Yext already has ~86% visibility - with the rest of new deals being purely incremental.

Here's some additional useful qualitative commentary from the company's president and head of go-to-market operations, Jim Steele, on sales momentum exiting Q4:

"As Howard said, we had a great Q4. It was the best quarter that I've experienced at Yext in my 3.5 years with Yext. We closed 236 deals with at least a $100,000 in total contract value versus 169 in the same period last year. That's 40% more, including 25 deals that resulted in at least $1 million of total contract value, including new logos and renewals of existing customers. The total number of customers increased 38% year-over-year to now over 1,900. This excludes our SMB and third-party reseller customers. Demand for Yext products was strong across the board [...]

We entered Q1 with a strong pipeline across the organization. We also had several significant annualized renewals that exceeded $1 million during the quarter, including Advance Auto Parts, Dunkin' Brands, McDonald's, T-Mobile, and Verizon."

The company has also executed well on sales hiring - lack of progress on this front crippled some venerable software brands in 2019, including names like Pluralsight (PS) and Zendesk (ZEN). Quota-carrying reps are up 42% y/y, which is a strong indicator of growth for 2021.

In additional good news: Steve Cakebread, Yext's veteran CFO, also noted that the company is "continuing to drive towards cash flow breakeven" in FY21, compared to an OCF loss of -$30.8 million in FY20. Yext's steep losses have been top-of-mind for investors lately, but we have to keep in mind that FY20 was an investment year for Yext as it ramped up its sales hiring and started to build out its new headquarters once its current HQ lease expires at the end of the current year.

Key takeaways

Few software companies can offer the same growth as Yext at its unbeatable value of ~3.5x forward revenues. With a unique stable of software products that have virtually no copycats in the market, Yext stands to benefit from the secular shifts toward data and automation, and it's not unlikely that larger companies may be looking at Yext as a bolt-on acquisition. Stay long here.

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.