Nextdoor: SPAC Darling

Summary

  • The Nextdoor SPAC deal was approved last week and will trade under "KIND" starting Monday.
  • The company raised $674 million due to limited shareholder redemptions.
  • Back at $11, the SPAC remains insanely expensive at a '22 EV/S multiple of 16x.
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Nextdoor, the neighborhood app

Cindy Ord/Getty Images Entertainment

Just when the SPAC market appeared lost for good, Nextdoor (NYSE:KIND) completed a deal with limited shareholder redemptions. Khosla Ventures Acquisition Co. II (KVSB) approved a deal with Nextdoor last week and the stock amazingly still trades above $10 while a lot of SPACs have collapsed far below $10. My investment thesis remains Neutral on the stock due to valuation concerns.

KVSB stock chart

Source: FinViz

Limited Redemptions

Despite the SPAC trading right above $10, a limited amount of shareholders in the Khosla Ventures trust chose to redeem shares. Most SPACs have faced massive shareholder redemptions greatly reducing the cash raised in the deal and leading to more pressure on the stock following the de-SPAC transaction. In theory, the company might have to eventually raise additional funds to reach the original funding targets, not to mention the stock trading far below normal warrant exercise levels of $11.50 further reduces the expected funds raised via the going public transaction.

In the case of Nextdoor, the company originally reported ~13% redemptions heading into the business combination vote. The company ultimately raised gross proceeds from the transaction of $674 million from the fully committed PIPE of $270 million and $404 million of cash held in the trust.

The SPAC gave shareholders up until the close of business on November 4 to cancel any of the previous redemption requests. The amount had dipped to only 7% of shareholders as of November 3 and fell to an immaterial amount when the deal officially closed due to the stock price rallying above $11.

The company is expected to start trading on the NYSE starting November 8 under the "KIND" ticker symbol. Nextdoor hopes to cultivate a kinder social media experience for users.

The company is run by former Square (SQ) CFO Sarah Friar suggesting either the quality of the company or the management team leads to better SPAC outcomes. SoFi Technologies (SOFI) recently completed a SPAC deal with the stock now topping $22. The fintech is led by former Twitter (TWTR) CFO Anthony Noto again repeating the concept of a successful de-SPAC when led by a well known CEO and business.

Strong Guidance

The actual problem with investing in the closed SPAC deal is the valuation. Nextdoor would've been a very attractive de-SPAC deal to buy on a collapse to $6. The stock has too much support for this outcome now.

Nextdoor trades with a valuation approaching $5 billion while the original guidance was for 2022 revenues only reaching $250 million. Nextdoor recently provided updated numbers for Q3'21 with revenues at $52.7 million growing 66% YoY.

The numbers were impressive considering the current struggles at Pinterest (PINS) with users due to the tough comps after the covid boost last year. Nextdoor isn't seeing the same impact and the company only has 33 million Weekly Active Users (WAU). Though, similar to Pinterest, Nextdoor has limited monetization of existing users at only $1.61 per user during Q3'21.

A big part of the investment thesis is growing interesting neighborhood related content to drive both higher WAU levels while attracting more local businesses looking for a nearby audience. The ultimate outcome should be higher monetization levels and an ad model with users subscribing to neighborhoods helping to bypass any privacy issues recently run into by other social media firms.

The company will report full Q3'21 earnings after the market close on November 10. The stock already trades at a premium valuation compared to other social media platforms. Of course, Nextdoor is a far smaller platform providing the potential for faster growth, but the recent Pinterest example highlights what happens when the forward EV/S multiple tops 15x and a hiccup in the business model occurs. Even Snap (SNAP) has recently given up a large portion of their premium valuation while Meta Platforms (FB) and Twitter trade at more normalized multiples of 6x forward revenues.

FB, PINS, SNAP, TWTR revenues
Data by YCharts

Nextdoor isn't crazy expensive for a social media stock growing in excess of 50%, but the stock isn't priced where shareholders will see the rewards. Another year of 50% growth in 2023 would produce revenues of $375 million for an EV/S multiple dipping down to ~11x.

The local social media company will likely burn substantial amounts of cash to reach cash flow breakeven, so investors need to be careful focusing too much on the EV related valuation for Nextdoor. The concern here is that as the market starts looking at 2023 numbers next year, the stock probably doesn't deserve much in the way of a higher multiple.

Takeaway

The key investor takeaway is that the Nextdoor SPAC transaction proves the concept is an effective way to take well-known companies with top management public. For this reason, the stock won't initially trade at an attractive valuation with the stock already up at $11. Investors should watch on the sidelines for now.

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This article was written by

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Stone Fox Capital Advisors, LLC is a registered investment advisor founded in 2010. 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.


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Disclosure: I/we have a beneficial long position in the shares of TWTR either through stock ownership, options, or other derivatives. 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.

Additional disclosure: 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.

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