KIND - Nextdoor: Eliminating The Elephant In The Room

2023-11-20 17:21:46 ET

Summary

• Nextdoor Holdings, Inc. is trading close to cash value with a new plan to become cash flow positive, presenting a buying opportunity.
• The social media company has a small user base and room for growth, particularly internationally.
• The stock is cheap, trading at less than 1x EV/S targets.

The small-cap sector has been knocked down so far stocks like Nextdoor Holdings, Inc. ( KIND ) are now trading close to cash value. The local social media firm has struggled to grow in the last couple of years after the Covid boost, but the business promises the Holy Grail in local advertising as scale on the new advertising platform is obtained. My investment thesis remains ultra Bullish on the stock trading at book value with a quick path to being cash flow positive now.

Major Catalysts

As highlighted in prior research, Nextdoor has a relatively small user base at only 40 million weekly active users (WAUs) with 85 million global verified neighbors. The company is only growing 6% YoY, with the user base dipping from the Q1 high over 42 million WAUs.

The big key is that international WAUs are only 8.1 million providing substantial upside. Nextdoor has 32.2 million U.S. users, and most social media companies have 2x to 3x more international users than domestic ones, though those users come at much lower ARPUs.

As an example, the similar Pinterest ( PINS ) has 482 million MAUs with 386 million residing outside of U.S. & Canada. The social imaging company actually has 4x the users outside of the U.S. & Canada combined.

Nextdoor continues to expand advertising options to grow the ad-focused business. ARPU actually fell in Q3 from $1.41 per WAU in Q3'22 to $1.39 in the last quarter.

A big focus of the company is the improving ad tech of the business. The company continues to enhance the Nextdoor Ad Manger/Server along with new technology helping small business utilize the self-serve platform with new video ads. The new Conversion API also provides additional visibility into return on ad spend, helping customers have more confidence in the money spent on the platform.

Eliminating The Elephant In The Room

The big elephant in the room for Nextdoor since going public has been the large ongoing losses. The massive cash balance wasn't viewed as a major asset considering the large ongoing EBITDA losses quarter after quarter. The social media company reported a $20 million adjusted EBITDA loss in Q3, which is actually higher than cash burn numbers.

Management announced a massive 25% workforce reduction to follow in the footsteps of other social media companies. CEO Sarah Friar worked for Jack Dorsey at Block ( SQ ), formerly Square, as CFO, and Mr. Dorsey has now seen both of his public companies undergo massive job reductions without any major operational problems, including up to 80% of the workforce cut at Twitter, now X.

Nextdoor has large gross profits, so the company primarily needs to get operating expenses under control. The company lost $44 million in Q3 2023 due to spending nearly $90 million on operating expenses.

The adjusted loss was much lower due to the $23 million spent on stock-based compensation. A big key to lowering the workforce will be a reduction in this compensation as well.

Nextdoor plans to reduce $60 million in GAAP expenses via eliminating the workforce by 25% and cutting other costs. The target amounts to $15 million per quarter and impacts non-cash, stock-based compensation.

The company targets being free cash flow positive in 2025, which is a goal that doesn't factor SBC. Nextdoor has only burned ~$45 million in free cash flow this year due to the benefits of $19 million in interest income from the large cash balance.

In essence, Nextdoor is cutting $15 million in GAAP expenses while only burning $15 million per quarter. About the only difference between the numbers is SBC cut including the estimates. In essence, the social media company should already be just about cash flow breakeven.

Under this scenario, the $540 million cash balance is a major asset helping deliver solid interest income to fund future development costs. Investors buying the stock here get a $200 million business nearly for free with the market cap at only $640 million.

Takeaway

The key investor takeaway is that Nextdoor remains incredibly cheap trading below 1x EV/S multiples. The company needs to return to growth, but management has finally solved the large cash burn situation, turning the large cash balance into an asset making the stock far more attractive on weakness.

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