YEXT - Yext: Risky Despite Cheap Valuation

2023-10-12 12:59:43 ET

Summary

• Yext's stock price has dropped ~70% in the past 24 months due to rout out from tech, revenue growth issues, high customer churn, and product quality problems.
• The company faces challenges with stagnant revenue growth, poor customer satisfaction, and questionable AI innovation.
• While Yext has a stable balance sheet and cheap valuation, investing in the company requires faith in the company's ability to turn things around.

Yext (YEXT) has seen its stock price plummet recently as the company has struggled with anaemic revenue growth, high customer churn, and product quality issues. While the valuation may seem attractive at current levels, Yext remains a highly speculative turnaround play until management can demonstrate meaningful progress. I rate Yext a Hold for now.

Investment Thesis

Yext operates a cloud-based software platform that allows businesses to manage their digital knowledge, power their website search, and control brand interactions across the digital landscape. Despite a stable balance sheet and cheap valuation, Yext faces multi-front challenges:

- Revenue growth has stalled to flat as the company struggles with high customer churn and low retention rates.

- Yext's core Listings product, which syncs business listings across sites like Google (GOOG) (GOOGL) and Facebook (META), has faced quality issues and poor reviews. Customers complain of inaccurate and outdated listings.

- The company's AI and conversational commerce efforts seem more marketing fluff than real product innovation in my opinion. I believe Yext has jumped on the AI bandwagon without clear differentiation.

- Founder-led management changes over the past year raise questions about the company's direction going forward.

While the market appears to be pricing in all the known risks, investing in Yext requires a leap of faith that new management can reignite revenue growth and make bold changes to turn operations around. The company does boast a strong balance sheet and has been generating positive free cash flow, limiting downside risk. But upside potential seems limited barring major improvements in growth and churn.

Business Overview

Yext operates a cloud software platform that structures and organizes business facts (store hours, addresses, menus, etc.) in a centralized database called the Knowledge Graph. This information can then be synced and updated across over 200 publisher sites and apps including Google, Facebook, Amazon Alexa etc.

The company's core product is Listings, which manages digital location data. Other products include Pages for website content, Reviews for generating and managing reviews, and Search for on-site search. Yext also recently launched AI-powered products like Answers and Chat to provide conversational search experiences.

Yext serves businesses across industries like retail, healthcare, financial services, and technology. The company generates revenue from subscriptions based on a number of locations/entities managed on its platform.

High Customer Churn and Dissatisfaction

Despite a large installed base, Yext has struggled to retain and grow its customers. The company's net retention rate has steadily declined from over 110% to just 97% last quarter. Contributing to poor retention are quality problems and dissatisfaction with Yext's core Listings product.

Reviews of Yext's platform on sites like Trustpilot and G2 are overwhelmingly negative, with just a 2-star average rating on Trustpilot based on 315 reviews. Customers complain of incorrect business hours, addresses, and other listing data showing up across the web even after repeatedly notifying Yext of the errors. They also cite extremely poor customer service and non-responsiveness from the company in resolving issues.

Clearly, dissatisfaction with Yext's offering is leading to higher churn, in turn crimping revenue growth. It appears new product launches have also failed to gain traction with customers still frustrated over basic listing inaccuracies. Yext must address quality concerns first before expecting customers to buy additional products in my opinion.

AI Likely More Marketing Hype Than Real Innovation

Seeking to capitalize on the AI hype, Yext has recently introduced "conversational search" products like Answers and Chat. However, these seem more like marketing so far than real differentiation in my opinion. The company has no particular AI expertise in my view, and is likely relying on readily available third-party natural language models.

It's difficult to see how Yext can provide superior AI search capabilities compared to Google, Microsoft (MSFT), and other tech giants investing billions in AI research. Promising AI without a real edge is unlikely to solve the company's churn and growth issues.

Stable Balance Sheet Limits Downside Risk

While top-line growth remains pressured, Yext does sport a rock-solid balance sheet. The company has zero long-term debt and over $200 million in cash, equivalent to ~25% of its market cap. Yext is also free cash flow positive, giving it leeway to ride out any extended business downturn.

Valuation Appears Cheap... But The Upside Depends On Growth

At current prices of around $6 per share, Yext trades at an inexpensive ~2x Price/Sales multiple. However, it's difficult for software stocks to sustain much of a sales multiple without topline growth.

Yext's depressed multiple likely bakes in expectations for revenues to continue declining. The upside seems limited unless Yext can show improving retention and growth trends. Waiting on more concrete turnaround signs would be prudent before investing despite the optically cheap valuation.

Risks to Thesis

While Yext's risk/reward still appears skewed to the downside, there are scenarios where the stock could meaningfully rebound:

- New management makes decisive moves that quickly improve customer satisfaction and retention.

- AI/conversational commerce products end up gaining real traction in the market.

- Yext gets acquired by a competitor or private equity firm attracted to its assets and client base.

However, betting on these upside scenarios playing out requires making bold assumptions that may not be prudent given Yext's multi-year track record of disappointing results. A "show me" approach seems appropriate for now.

Conclusion

Yext's depressed valuation limits downside risk, but a substantial upside appears unlikely without meaningful improvements in the company's operating trends and competitive positioning. For a profitable company with a strong balance sheet, growth below 2% and retention under 100% signify deep business challenges.

Relatively new management deserves time to implement changes and try to reinvigorate growth after a year of transition. But trusting that a turnaround will happen requires a leap of faith that may be premature. It's prudent to await more concrete signs of improving traction under the newer leadership team before making a speculative bet on Yext's turnaround.

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