KIND - Nextdoor Holdings Is In A Unique Position To Grow

2023-09-06 13:53:41 ET

Summary

• Nextdoor saw a 13% increase in Weekly Active Users in Q2 2023, demonstrating the platform's growing popularity.
• Despite the rise in users, the Average Revenue Per User decreased by 7%, indicating monetization issues.
• Nextdoor is significantly ramping up its R&D efforts, even though it lags behind competitors in ad technology.
• Its unique dataset and high trust is still the biggest value generator for the company.

Business Update

So, let's dive into Nextdoor Holdings, Inc.'s ( KIND ) recent quarterly performance . On the plus side, Weekly Active Users (WAUs) are on the rise, reaching 41.6 million - a 13% jump compared to last year. The Net Loss for the quarter also showed some improvement, dropping 4% to $35.4 million. If we zoom out to the first half of the year, the Net Loss decreased by 1% to $69.1 million. Liquidity is also solid, with cash, cash equivalents, and marketable securities sitting at $551.6 million.

However, it's not all smooth sailing. Average Revenue Per Weekly Active User (ARPU) saw a 7% decline, slipping to $1.37. Revenue for the quarter edged up by only 4% to $56.9 million. The cost side of things isn't particularly rosy either-expenses climbed by 6% both for this quarter and the first half of the year.

Overall, Nextdoor remains in high demand, but its capability to effectively monetize continues to be a question mark.

Lots of Catchup Work to Do: Nextdoor's Investment Phase

Nextdoor is deeply invested in Research and Development (R&D), with a ratio of R&D to revenue that stands at a lofty 63%. That's significantly higher than industry juggernauts like Google and Meta. Since 2020, the total employee count has grown by 50% to 700, although that's still a far cry from Yelp's 5,000-strong workforce.

Despite these investments, Nextdoor's ad technology is still a work in progress, especially when it comes to self-service platforms for advertisers. They're actively hiring software engineers and focusing R&D efforts to plug these gaps. New API initiatives are underway, and their AI models are being refined to better utilize unique data for targeted advertising. The expectation is that it will take another two quarters for the customer base to fully adapt to the new self-serve ad platform.

To put it succinctly, Nextdoor has catchup work to do. To build a social network is not easy, it needs to keep investing in its capabilities to navigate the super competitive digital Ad market.

The Quality of Network is Evident

A key indicator of Nextdoor's success and sustainability is the 13% growth in Weekly Active Users (WAUs), which reached 41.6 million in Q2 of 2023. This isn't a mere blip on the radar-90% of these users are organic, not influenced by paid marketing. In addition, the platform saw an influx of 2 million verified new neighbors in the last quarter alone, bolstering its user base without additional advertising costs. Furthermore, there has been a 24% increase in sessions, underscoring the growing engagement among users.

These figures are not just numbers on a spreadsheet; they represent a top-of-the-funnel growth that is a management priority. The leadership team has successfully executed strategies to achieve this growth, marking a strong quarter for the company.

The effectiveness of these efforts reflects the quality of the Nextdoor network, a self-sustaining platform that has garnered substantial organic growth. With increasing user engagement and a growing customer base that's largely acquired without significant marketing spend, the quality of Nextdoor's network is not just evident-it is exemplary.

The Future Monetization Opportunities Become Larger

As of now, Nextdoor is already a hotbed for businesses to connect with local communities. The numbers back it up - 4.1 million businesses have claimed their pages on the platform, a two-fold increase from less than 2 million less than two years ago. Also, let's talk about the surge in mid-market logos, which rose 17% quarter over quarter.

But it's not just about the U.S. market; international growth is also impressive. We're looking at a 28% year-over-year bump in revenue and a 79% increase in international logos. Add to that, the marketplace for 'for-sale and free' items on Nextdoor has a Gross Merchandise Value ((GMV)) of over a billion dollars a month. So yeah, Nextdoor isn't just about borrowing a cup of sugar from your neighbor anymore. It's evolving into a robust marketplace with significant monetization potential.

Trust is the Key Asset

Trust is the currency of any social network, and Nextdoor is cash-rich in this department. Being the only purpose-driven digital neighborhood network, it's already won over skeptics. Around 91% of users say that supporting local businesses is a priority for them, and 75% feel more connected to their community because of Nextdoor.

Remember when Nextdoor launched in Canada around the same time as the ' Facebook of neighborhoods '? Guess which platform people put their faith in? Yep, Nextdoor. Users have shown they prefer a network that is built to foster real community ties and protect their data over one that might commodify it. So, the reputation and trust that Nextdoor has built over the years? That's golden, and it's not something that can be easily replicated by competitors.

Price Actions

When it comes to price movements (chart below), the chart below shows the price action characteristics between 2022-10-17 to 2023-09-03. KIND showed wider daily return fluctuations than the market average, with a standard deviation of about 4x of SP500. This means much higher volatility compared to the overall market. Most days have negative returns and underperform SP500 overall. The stock often traded in an intraday range, with most times dropping or raising an average of 3% from the open price. When shocking good/bad news comes, we see one day fall for 10%+ 2 times and one day rise 10%+ 4 times. There was one time it raised 20% in a day from the open.

If we calculate the correlation ratio of KIND prices to all major sector ETFs, KIND is mostly trading with sectors like Consumer Discretionary ( XLY ) with a fairly high correlation ratio of 0.72.

Risks

Regarding risks, the digital advertising space is a fiercely competitive arena, crowded with titans like Meta (META), Google (GOOG) (GOOGL), Amazon (AMZN), Twitter, and Pinterest (PINS). They have seemingly unlimited resources, making it an uphill battle for smaller players like Nextdoor to carve out a significant market share. Financial constraints are another hurdle. Nextdoor is still in a growth phase, which means capital is a critical resource. Unlike its bigger rivals, the company doesn't have the financial muscle to burn through cash while figuring out the best monetization strategies. This puts added pressure on making the right strategic moves, without much room for error. Talent retention is also pivotal for Nextdoor. The company is in the midst of major developmental leaps, and a stable, motivated workforce is critical for this. Any shakeup in the management, especially the departure of key personnel like CEO Sarah Friar, could set back the company significantly.

Bottom Line

Nextdoor is facing challenges, especially in the ad tech department and overall monetization. But if you zoom out, you'll see a platform that's gaining traction fast, both domestically and internationally. The Weekly Active User growth and trust levels are through the roof. Businesses are flocking to claim their pages, and the management team isn't just sitting on their hands-they're actively investing in R&D and human capital to play catch-up and then some.

With a 1.5x EV/sales ratio, it's trading at a discount, especially when you compare it to bigwigs like Google and Meta, which are at 5 to 6x. Considering Nextdoor's untapped potential for user monetization, the stock looks undervalued. However, when comparing with Seeking Alpha peers such as [[YALA]], [[FUBO]], [[PGRU]], [[VMEO]], [[ZH]]. KIND's EV/sales ratio of the group all comes down a lot. But KIND is still in the higher end. I think the stock is unfavored and unnoticed by the general public for now. If KIND can keep executing its monetization strategy, the sentiment might change.

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