Summary
- Nextdoor has a differentiated product that makes it stand out from its peers.
- KIND has a unique value proposition for businesses and public agencies.
- KIND's business model has a strong flywheel effect.
Investment thesis
I believe Nextdoor ( KIND ) is fairly valued. Advertising companies are investing in strategies that precisely target their customers. The idea of grouping people based on their physical proximity is one way of targeting, and it improves the efficiency of advertisements. KIND provides this solution by segmenting a population based on physical proximity. This takes the advertising game a notch higher. An ad intended for a specific locality will have a higher conversion rate with KIND. I like the business and idea, but the valuation seems a little too high for my current risk appetite.
Business overview
Nextdoor is a social networking service for neighborhoods. It brings together real people and organizations that are physically neighbors to each other. Nextdoor creates an "Active Valued Community" which is a source of trusted information, real-world connections, and business and public service engagement.
KIND has a differentiated product with strong value proposition
Nextdoor enhances the use of technology to connect people, businesses, and organizations within a given physical location. It is the interaction of these three sets of groups that defines a neighborhood. To keep scammers away, KIND verifies all user information at sign-up. This way, only groups with physical proximity can be connected together. KIND also connects people to broader networks that are important to them, for example, where they own a business, where they want to move, or even where their children or parents live.
By verifying all people and groups joining KIND, they ensure that only trustworthy information can be spread through their platform. As a matter of fact, Government entities and organizations use KIND to share real-time information with neighborhoods. Mayor Khan in London, the Ministry of Health in France, and the Red Cross in Houston are already using KIND to pass local-perspective information (source: KIND S-1).
On a smaller scale, KIND has also been used by neighborhoods to source babysitters, organize community clean-ups, sell unwanted household items, and seek or provide help. This is made possible by the level of trust people bestow on KIND and the fact that only a neighbor can give you trustworthy information and recommendations.
With the current digital migration, information is spread from one end to another instantly. The only setback is that both verified and unverified information is equally conveyed. KIND ensures verified and trusted information is passed to neighborhood groups. Save for the major E-commerce stores, most commercial businesses are local, and KIND provides them a platform to reach the neighborhood they are located in.
The setup of KIND can be equated to a rightly targeted marketing and advertisement strategy. By giving businesses and organizations a platform with real people within their physical reach, the businesses and organizations can directly build awareness, drive sales, and offer help to the community. This platform gives businesses an opportunity to reach the right customers at the right time with the right message.
The top three factors that differentiate KIND from competitors are:
- Highly relevant content is shared via KIND. Due to the commonality of their physical proximity, only content related to or affecting residents is shared. KIND provides their customers with this unique platform to air their message and reach different demographics and geographies.
- The ability to reach customers locally and nationally with local customization enables businesses to build fruitful connections with customers and neighbors.
- As neighbors look for real-time solutions in KIND, businesses can reap the benefits of these engagements. Hershey, which makes a lot of chocolate, is a good example. They used the desire of their neighbors in KIND to increase their add-to-cart and sales, which helped them beat their goal by 140%.
Public agents and organizations get a chance to carry out community needs assessments to know what is important to specific neighborhoods. This helps them deliver critical information that the neighbors will feel is meant for them. KIND is also used to pass information about local events and local messaging, e.g., power outages, and during a crisis to give timely safety updates.
Strong flywheel effect
With a verified user base of up to 69 million (as of the 4th quarter of 2021 ), KIND has penetrated more than 285,000 neighborhoods in 11 countries worldwide. Apart from the United States, where it was founded, KIND supports neighborhoods in the United Kingdom, Canada, Australia, the Netherlands, France, Spain, Italy, Germany, Sweden, and Denmark.
In the United States, 1 in 3 households uses KIND to get useful information, get help, and build worthy connections.
KIND is a self-sufficient system. By focusing on neighborhoods, KIND has eased how people living in a given geographic location seek help or provide help to others. Any positive engagement on this platform serves as an "advertisement" to people who are yet to join in. By word of mouth, participants on the platform encourage others who have not yet joined to come on board.
This craze has not spared businesses or organizations either. On their side, they encourage their customers to join the platform to recommend their businesses or the cause they seek. This upward growth loop is continuous, as it also provides KIND with feedback on how to improve the platform.
Opportunity to increase monetization
Based on my research, there are two key ways for Nextdoor to increase monetization:
- Increase penetration of neighborhoods
- Increase number of advertiser base and expansion to new verticals
The total addressable market for the company's current offerings is more than 200 million households. These numbers clearly suggest that there is still lots of room for development.
I believe Nextdoor can grow its user base and market share through a combination of free (making its content searchable on Google Search to increase its top of the funnel) and paid methods (cold mail, for example). Adding new use cases and making existing ones more relevant is the most crucial step here. To increase user engagement and stickiness, the most obvious use case is for users to join multiple communities. Having users connect to multiple neighborhoods would also greatly enhance KIND's flywheel effect as it offers more addressable and targeted users for businesses and other relevant public agencies.
Currently, Nextdoor's advertiser base is composed of both enterprise and SMB advertisers, with home services, retail, financial services, technology, and telecommunications serving as key verticals. The future holds great potential for Nextdoor as it continues to grow its advertiser base through direct sales, ad product innovation, international expansion, and the capture of larger budgets from non-core verticals like healthcare, CPG, and travel. Ad pricing should improve as a result of higher auction density and a wider range of potential funding sources.
Management's assurances of future investment in enhancing the platform's targeting and measurement capabilities, as well as its overall advertising offering, are encouraging. KIND's recent launch of Neighborhood Ads Center is an example of this kind of action, and I expect it to aid in advertiser onboarding and help the company secure a larger share of future advertising budgets.
KIND's path to profitability
I count on management to keep their attention fixed on the essential investments that will fuel sustainable expansion. Given that Nextdoor is just beginning to monetize its services, I anticipate that future increases in average revenue per user will allow the company to achieve greater leverage over its relatively stable operating expenses. Increases in monetization and ad prices should lead to rising gross profits (KIND's is over 80% gross margin), which pave the path to a highly profitable company in the future once KIND stops investing for growth.
Valuation
Based on current consensus estimates, which are achievable based on my thesis above, I believe the upside from here is not great. My model suggests a 1-year return of 8% from the current share price, which is not the best entry point for investors.
In the short term (FY22), management expects revenue to fall in the range of $200 million to $225 million. This gives some level of confidence that KIND has not been hit hard by the slowdown in ad spending. KIND is currently trading at 1x forward revenue, and I assumed it would trade at the same valuation in FY23. However, any upside rerating would be additional upside for investors.
Risks
Exposure to advertising industry
KIND's revenue is generated from the sale of ad space on their platform. Due to the specific locality reach, businesses only spend a small percentage of their ad budget on KIND. The businesses also do not commit to long-term advertising due to the dynamic nature of advertising. If these investors bail out, KIND will face an economic contraction.
Competition
KIND's source of revenue is advertising. The advertisement industry has giant, successful companies like Google, Facebook, and Twitter. If these companies introduce similar products and services as KIND, it will harm KIND because these companies have massive resources, trust, and expertise in the advertising sector.
Conclusion
To conclude, I believe KIND is fairly valued today. With a self-sufficient, self-improving system, KIND positions itself ahead of the highly localized news channels. Being an engagement platform where one can acquire meaningful connections also adds to its credibility and foretells of its success. As people seek to have gainful neighborhood relationships, KIND will reap from the market.
For further details see:
Nextdoor: Differentiated Product With Unique Value Proposition, But Fairly Valued