Yext (YEXT) remains a puzzling stock in the technology space. The stock has returned to the 2020 highs, but Yext hasn’t rallied to new highs similar to other tech stocks, while the company continues to generate record results and point to a promising future in corporate search. My investment thesis remains very bullish on the stock, especially considering another dip following FQ3 results.
Image Source: Yext website
Looking For More Answers
The digital knowledge management company rebranded as the search experience cloud company continues to disappoint the market. FQ3 revenues beat analysts’ estimates, but FQ4 guidance was a huge disappointment as customers delayed expansion during virus lockdowns.
The new Answers product provides businesses with a method of taking control of search on their own websites. The company has documented how unsatisfied customers end up searching on the Google (NASDAQ:GOOG) (NASDAQ:GOOGL) ad network and ending up sent to other websites. Customers are more happy with finding the correct answers on the customers’ website, and the enterprise saves up to $5 in costs for every answer by reducing the need for customer reps. The CEO provided the following example of a 42% reduction in customer service calls at Krispy Kreme once implementing the Answers product:
So we think that search has a place where it will always be, which is to deflect as many chats or as many customer success or service calls as possible, you know, Krispy Kreme for example in that example we gave earlier, they’ve seen a reduction in call volume to their call center of 42% since putting answers up…
Despite the exciting products, the company has struggled during the COVID-19 shutdowns as customers are more focused at digital transformation for WFH solutions while delaying expansion with Yext. Clearly, investors need to be patient here.
For the quarter, Yext grew revenues by 17% to reach a quarterly record of $89.1 million. The company has seen growth rates fall from the 30% range to guidance of only $88 million in the current quarter that amounts to less than 10% growth.
The bullish thesis was for revenues to rebound in FQ4 to reach $94.0 million for 15.6% growth. A return to accelerating growth is what the market wanted to see from Yext.
Considering the recent quarterly beats have averaged around $2 million, investors should assume FQ4 revenues actually top $90.0 million. Of course, this number is still a major disappointment with sales growth dipping from 17% in the last quarter to only around 11% in the current quarter.
The company suggests virus shutdowns continue to impact sales. The good news is that Yext cut losses in the last quarter by boosting gross profits by 20% YoY due to a 240 basis point boost in gross margins to 75.7%.
Yext nearly eliminated the non-GAAP net loss in the quarter. The company still used $7.4 million in operating cash flows, but the search experience cloud leader greatly reduced the cash burn from a massive $31.8 million loss last FQ3.
Management suggested the FQ4 results will be tougher than back during FQ1 and parts of FQ2. Investors can make some assumptions that Yext is being far too conservative at the start of December, but at least the cash burn has been cut to allow survival until business improves. The company ended October with a cash balance of $209 million so high cash burn rates would’ve pressured Yext into needing to raise more funds.
The structured facts in the knowledge graph grew by 58% in the quarter to 405 million. In addition, the customer count was up 28% to 2,300 providing more tools to lead to a growth rebound down the road as business normalizes around the world.
While the stock faces another dip following a quarterly report, Yext is a cheap stock once the business climate turns in their favor. The company is trying to replace Google search for websites, and the stock is now far cheaper than Alphabet.
The valuation dip isn’t a real surprise, considering the disappointing FQ4 guide, but the company maintains the potential to return to growth far in excess of Alphabet’s sub-20% growth rates reported back in 2019. Management was unwilling to call the current quarter as the low-water mark in the cycle, but business is clearly bouncing around the bottom and will improve once lockups are lifted around the world, and especially in Europe.
Regardless, Yext now trades below 5x forward sales estimates despite having a solid long-term growth trajectory. Once the company gets back to previous growth levels, the stock has solid multiple expansion potential on top of the 20% or 30% annual growth rates.
The key investor takeaway is that guidance wasn’t the answers the market wanted to hear, but the stock remains a bargain to buy on dips. Yext offers compelling products to help enterprises manage structured facts utilized to provide information to customers correctly and save costs. The stock will thrive as economies around the world normalize next year. Investors need to be patient for business to hit the low-water mark in the next few months.
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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.
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.