2023-03-08 19:13:07 ET
Summary
- Yext, Inc. reported a mixed quarter with higher profits, but the company has limited revenue growth now.
- The data knowledge company has shifted the business to profit growth, constraining revenue growth in the near term.
- YEXT stock is cheap at 2x EV/S targets, even after doubling off the '22 lows.
The excitement over generative AI chat sent Yext, Inc. ( YEXT ) to recent yearly highs. The data knowledge company focused on Answers helps corporations answer consumer questions via AI technology and has started due to the use of generative AI chat. My investment thesis is Bullish on YEXT stock despite the recent large rally due to a depressed valuation multiple and strong shift towards profits.
Source: Finviz
Profit Shift
Yext, Inc. reported a decent FQ4'23 earnings report , with the following numbers:
- EPS of $0.05 beats by $0.02.
- Revenue of $101.9M (+1.0% Y/Y) beats by $1.54M.
The company isn't growing revenues anymore, but Yext is now far more profitable. The data knowledge company provided the following guidance for the business for FY24 compared to consensus:
- FQ1'24 Revenue is projected to be in the range of $98.0 million to $99.0 million, vs. consensus of $101.33M. Non-GAAP net income per share is projected to be in the range of $0.05 to $0.06, vs. consensus of $0.03.
- FY24 Revenue is projected to be in the range of $402.0 million to $406.0 million, vs. consensus of $416.00M. Non-GAAP net income per share is projected to be in the range of $0.22 to $0.23, vs. consensus of $0.13.
The stock initially sold off based on weak revenue guidance, but the market quickly flipped as the company is now far more profitable. Yext guided to FY24 EPS of up to $0.23 producing net income in the nearly $30 million range while the consensus analyst estimates were only $0.13.
Last year, Yext, Inc. cut the workforce by 20% and repurchased 10% of the outstanding shares. For the company to only lose some of the lower margin revenues in the process is a huge positive, though the stock market doesn't always reward such outcomes.
The company made the following prime moves that will constrain revenues over the next year, but ultimately boost margins and profits from more efficient operations:
- Moving to a partner-centric go-to-market strategy in Japan and
- Reducing our direct sales efforts to SMBs.
- Focusing our services offering on the highest value activities for customers which I'd like to discuss in more detail.
In addition, the company thinks Yext Chat will provide every business with a conversational AI experience that is generated from accurate information stored in the knowledge graph of a company. Yext believes they can eliminate the risk of bad answers where current generative AI chat programs tend to hallucinate with made up answers.
While Yext Chat sounds like a promising product, the new management team still has to outline a path towards where this AI chat product drives actual revenue growth. The current operational shift in the business model is possibly hiding some of the underlying revenue growth from the AI chat product.
Still Cheap
Yext, Inc. stock has rallied sharply off the 2022 lows of $4 for over a double now, but Yext still only trades at 2x forward EV/S targets. A SaaS company with 10% growth will easily rally towards a 5x EV/S multiple.
Yext has rallied off the lows, and the valuation equation hasn't really changed dramatically. The stock shouldn't have dipped all the way to $4, so investors need to view the current stock price as more of the actual low end of the range.
The company has $190 million in cash and projected adjusted EBITDA of $44 to $46 million to further make the stock attractive here. Management repurchased 13.8 million shares for a total cost of $77.4 million last year.
Yext bought ~10% of the outstanding shares, but the company guided to a share count of 122.9 million in FQ1'24 in comparison to 131.1 million last FQ1. The company now has the cash flows to continue repurchasing shares here.
Takeaway
The key investor takeaway is that Yext, Inc. was left for dead last year and the stock has now rallied on an improving profit picture. Yext, Inc. stock is still cheap and worth an investment due to the opportunities surrounding AI chat and other products, but the company has to return to growth in order to reward investors.
For further details see:
Yext: Ride The Profits Shift