- Yext delivered solid FQ1 growth with guidance for FQ2 growth topping 17%.
- The stock is only back to pre-virus levels despite the ability to generate strong top line growth.
- At a more normal 6x EV/S targets, the stock is worth $26.
- This idea was discussed in more depth with members of my private investing community, DIY Value Investing. Get started today »
As digital transformation stocks soar, Yext (NYSE:YEXT) is one stock in the group left behind. The stock remains far below 2018 and 2019 levels despite the ability to maintain growth estimates in excess of 17.5% with a large set of customers in retail and food service verticals shutdown. My investment thesis remains highly bullish on the stock as the market continues to overlook the growth of this digital transformation company.
Image Source: Yext website
For the just reported FQ1, Yext reported revenues of $85.4 million for 24% growth. The company has a strong history of revenue growth since going public back in 2017, but the stock has gone absolutely nowhere over this period despite consistent growth.
The last quarter had an annualized revenue run rate of $342 million with analyst estimates of $356 million for FY21 despite the COVID-19 impact to customers. Yext has seen numerous customers furlough their contacts, slowing down renewal processes.
The search experience cloud company still guided to FQ2 revenues of $85 million for over 17% growth:
Source: Yext FQ1'20 earnings release
The biggest uncertainty and concern with Yext was the ongoing losses. The company forecast a non-GAAP loss for the quarter of $0.12 after reporting a $0.10 loss in the last quarter.
For FY20, Yext reported the company had negative operating cash flows of $30.8 million. The company ended April with a cash balance of $248.8 million.
Clearly, Yext doesn't have a lot of risk with the cash balance considering the limited cash burn along with the ability to maintain growth. The digital knowledge company has remaining performance obligations of $293.8 million, up from $256.3 million in the prior FQ1, with the majority set to be recognized over the next year. As long as these RPOs continue to grow, the company is in a strong position.
On the FQ1 earnings call, CEO Howard Lerman highlighted the huge advantage of Yext. The company provides the digital information needed by consumers at a time period when dozens of websites over the Internet provide crucial information to potential customers. The ability to provide accurate information on store openings to all of these tools is nearly impossible without a digital management tool such as what Yext provides.
Not only is providing accurate information fed to other data aggregators such as Google or Yelp important, but answering questions via their corporate website can prevent unnecessary calls to customer service and save cash. According to the CEO, Yext save customers a nearly $5 per transaction in order to generate solid ROI:
"And on average I think a support call we produced a paper on this cost $4.90. So every time with an answer a great strategy for a company is to put up our answers bar to catch people before they call. Because if you can answer a question it's going to save you $5 and we can show the company within the analytics the exact questions people are asking and the answers we're giving."
Along with this, Yext provides a more valuable tool via the analytics from the questions being asked by customers that can't be as easily aggregated with logs from customer service reps. A product that helps with customer acquisition and saves money provides a strong ROI for customers making renewals rather easy outside of a pandemic.
My investment thesis has started focusing on how Yext should trade at higher valuation multiples than Alphabet (GOOG) (GOOGL). Yext has far higher growth rates that were holding steady near 30%, yet the stock actually trades at a lower forward EV/S multiple than Alphabet with mid-teens growth.
In more normal times, Yext should easily return to the 6x EV/S multiple. With FY22 revenues targeted at $425 million, the stock would have a value of $24. Assuming a return to 30% revenue growth next FY, Yext would generate revenues of $463 million for a stock price of nearly $26.
The key investor takeaway is that Yext remains a consistent grower that the market continues to overlook. The bargain stock is generating solid revenue growth during the virus shutdown while the bet is for multiple expansion to take place over the next year as revenue growth returns to more normal 30% growth rates.
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This article was written by
Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA.
Stone Fox Capital launched the Out Fox The Street MarketPlace service in August 2020.Invest with Stone Fox Capital's model Net Payout Yields portfolio on Interactive Advisors as he makes real time trades. The site allows followers to duplicate the model portfolio in their own brokerage accounts. You can find the portfolio and more details here:
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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.
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