YELP - Yext Q2 Earnings Preview: Analyst Expectations Have Moderated

2023-08-30 10:25:18 ET

Summary

• Yext's recent selloff post-Q1 results has created significant uncertainty in its stock's trajectory.
• The company's struggle to boost its revenue growth rates remains a major concern for investors, as it impacts the stock's investment appeal.
• While Yext holds a clean balance sheet and generates free cash flows, its valuation isn't deeply undervalued, considering the current state of its top line revenue.

Investment Thesis

Yext ( YEXT ) has unjustifiably sold-off post Q1 results . Consequently, investor expectations are now much lower, as Yext heads towards its fiscal Q2 2024 results post-market next Wednesday , September 6.

Recall, that Yext is a debt-free business, with more than 20% of its market cap being made up of cash. The main bearish thesis here is that Yext is struggling to reaccelerate its revenue growth rates. Meaning that, unless Yext can start to deliver some strong top line growth, investors will continue to sidestep this stock.

For my part, I still remain hopeful that Yext has what it takes to reignite its operations and start delivering some top line growth.

What's Yext?

Yext provides a platform where businesses manage and disseminate their critical factual information across the digital landscape. At its core, Yext offers a platform known as the Knowledge Graph, where businesses can meticulously structure and maintain data about their brand, including essential details like addresses, hours of operation, menus, and more. Yext seeks to provide a service where businesses can control their facts everywhere online.

Yext centralizes its factual information through a structured database known as the Knowledge Graph. This enables businesses to provide accurate and consistent answers to consumer queries across various digital platforms. Yext's core mission is to empower businesses to manage their information proactively, offering search optimization and analytics, on its Publisher Network. Yext's Publish Network includes major platforms like Amazon Alexa ( AMZN ), Google ( GOOG ), Siri ( AAPL ), and Facebook ( META ), among others.

In some ways, Yext is a bit like Yelp Inc. ( YELP ). Yelp is predominantly a consumer-oriented platform that offers user-generated reviews and ratings. Yelp's primary value lies in providing consumers with crowd-sourced insights into local businesses, including ratings and detailed reviews. Both platforms have some overlaps, even as their core functions differ.

The Chief Concern Amongst Investors

Yext's revenue growth rates are pretty small. In fact, that's the crux of the bear argument. Why should investors be willing to back this public company with such lackluster growth?

A public company is only deemed to be an acceptable investment provided the business is expected to continue growing. And if that's not the case, then the multiple that investors will be willing to pay for the company's stock will continue to compress, with more insights on this in a moment's time.

Before that, let's address analyst expectations.

If you've read my work before, you'll have seen me say, don't fight the Street. What you don't want to do is invest in a company where analysts are consistently lowering their revenue consensus figures. That's rarely a worthwhile investment, those stocks that are highly risky investment propositions.

What you see above is that analysts following Yext have now stabilized their financial models. That's not to say that they are bullish on the company. I'm simply stating analysts are not bearish. That's a much better setup for new investors, rather than when analysts are bearish on Yext as they were earlier in 2023, see graphic above.

What Sort of Multiple Makes Sense?

I believe it's worthwhile to observe a company's P/Sales multiple, as that provides a useful gauge of where investor expectations are for the company. As you can see above, since the start of 2023, Yext's multiple has expanded by around 35%, but it's far from a hyper-stretched valuation.

That being said, I believe that should Yext maintain its current trajectory, there's a strong likelihood of generating approximately $55 million in free cash flow by fiscal 2025. This projection implies that YEXT stock would be trading at roughly 18x its forward free cash flows. However, it's important to note that this valuation doesn't qualify as a deeply undervalued multiple, particularly considering the sluggish growth in its top-line revenue.

This means that it all once again circles around to one critical contention: can Yext reignite its revenue growth rates? If it can, then given that both the stock has already sold off substantially since its Q1 results, together with the fact that Yext is clearly generating free cash flows, plus the business holds a clean balance sheet , then I believe this could become a worthwhile investment. Even as I concede that this business still has to deliver a ''show-me'' set of results next week.

The Bottom Line

I find it challenging to fully gauge Yext's current position as uncertainty looms over its stock. The company experienced an unwarranted sell-off following its Q1 results, dampening investor expectations ahead of its Q2 2024 earnings report.

Yext, a debt-free business with a significant cash reserve, has been grappling with sluggish revenue growth, a key concern among investors. While I hold a glimmer of hope that Yext might rekindle its operations and ignite top-line growth, it's evident that the stock is facing skepticism from the market.

Yext operates in a niche where it empowers businesses to manage and disseminate their factual information online through its Knowledge Graph platform. This structured approach aims to provide accurate and consistent answers to consumer queries across various digital platforms.

However, its sluggish revenue growth remains a substantial hurdle, leading to questions about its investment worthiness. Analysts have tempered their expectations, stabilizing revenue consensus figures, but this doesn't necessarily indicate strong bullish sentiment. Yext's price-to-sales multiple has expanded modestly, suggesting some investor optimism, yet it still falls short of being a deeply undervalued opportunity. Ultimately, Yext's future hinges on its ability to reignite revenue growth, and until it can provide convincing results, the stock's prospects remain uncertain.

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