Prior to the FQ3 report, Yext (YEXT) was one of the cheapest stocks in my coverage universe. The company reported a decent quarter and hit some impressive growth metrics indicating future growth potential remains very strong, but the guidance hit the stock hard. The data knowledge stock remains a strong buy into the new year after a 20% dip.

Story Intact

Despite reporting consistent 30% growth, the stock has consistently had dips into the $12s since the IPO. The FQ4 guidance isn’t going to help the story in the short term.

Yext consistently beats revenue estimates by a slight margin while still managing to generate strong growth. The market just isn’t going to like the FQ4 guidance of $79 million to $81 million. The company generated revenues last FQ4 of $64 million so the guidance is for only 25% growth at the midpoint.

The stock is down 20% on the news and the move isn’t shocking. The company is still reporting massive quarterly losses adding risk to the story despite the company having a cash balance of $245 million.

Yext is implementing a new product called Answers leading to the hit in revenue expectations in the short term. The demand for the knowledge graph isn’t changing, but the platform on how customers provide the data to consumers is changing somewhat causing customers to pause in purchase decisions.

Source: Yext Onward 19 presentation

The company is the future of search due to a platform with 259 million data facts making basic search meaningless to most consumers. For this reason, mid-market and enterprise customers were up 46% YoY to 1,766. In addition, unearned revenue grew 32% over last FQ3. Both of these metrics are highly supportive for revenue growth continuing in the 30%+ range.

The issue here isn’t the business opportunity. Yext explained the weak guidance on the earnings call as the following:

This is the first major product that we’ve launched in five or six years. And it slowed the deal cycles down a little bit for upsells for new customers.

This issue will pass.

Bargain Bin Value

The stock was already cheap and this dip makes Yext one of the cheapest cloud software companies with growth near 30%. The company provided a logical explanation for the FQ4 revenue miss, suggesting the stock dip is a major opportunity.

Yext now trades at only 3.7x forward revenue estimates as the stock value dips to $1.5 billion and revenue forecasts are near $400 million for FY21. Cloud software stocks with consistent revenue growth in the 30% range typically trade for double and even triple this valuation multiple.

ChartData by YCharts

No reason exists to doubt Yext doesn’t end up hitting FY22 (January) revenue targets of over $500 million. In such a scenario, the stock could easily trade at a valuation of $3.5 billion based on 7x revenue estimates or ~$30 based on 112 million shares outstanding. Such a target could be expected by the end of 2020 as the company heads towards the start of FY22.

The only major hiccup to the story is the history of ongoing losses. For the quarter, Yext reported a net loss of $21.6 million. The company needs to quickly start whittling down this loss to participate in the multiple expansion here.

Yext claims the TAM has doubled from $10 billion to $20 billion, warranting the investments and growth in sales reps to capture the opportunity, but the market isn’t rewarding the stock here. As quarterly revenues start topping $100 million, the data knowledge company will need to reduce the losses below $10 million or the market will start panicking about the cash balance and a need to raise capital.

Takeaway

The key investor takeaway is that Yext is now in the bargain bin. The stock trades below 4x forward revenue estimates and very few opportunities ever exist to own a 30% grower at such a low valuation multiple.

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.

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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2019-12-07