Yext Inc. (YEXT, Financial) recently faced one of its worst days since listing when the stock crashed by nearly 20% after the release of its results of the third quarter. The New York-based company is a knowledge engine platform provider that helps businesses control their public-facing information across search engines, apps, social networks, maps and so on. After the recent dip, the important question that most investors are looking to answer is whether the worst is over for Yext and whether it is a value buy at current levels.
A bad quarterly result
The third quarter results of Yext were reasonable on the revenue front. The management achieved a top line of $58.7 million, grown by 33% compared to the same quarter in the previous year. The revenue numbers beat analyst estimates as well, but the problem with the result was Yext’s profitability. The company reported a loss of $24.8 million, which was a 45% increase compared to the previous year, which was significantly higher than market expectations. The market might have factored a better profitability for the company after the Amazon (AMZN, Financial) deal and the poor bottom line is perhaps the reason for the sharp decline in the stock price.
Why was Yext priced so high in the first place?
There is a reason why Yext has always been a pricey stock in terms of valuation multiples despite its heavy losses. The company’s technology is truly commendable as it uses artificial intelligence to transform the world of knowledge management and digital search. The fact that businesses can directly synchronize data with Facebook (FB, Financial), Google (GOOGL, Financial), Cortana, Instagram, Siri, Google Maps and so on, and also use AI-based offerings such as Yext Brain and Yext Think, has made the company interesting over the years. The consistent annual revenue growth of more than 30% has also contributed to the high valuations. However, the recent crash has proved that if the management does not improve Yext’s profitability, the valuation is not here to stay.
The fundamental cracks are becoming more And more visible
As we can see in the chart, Yext’s stock surged during the year, largely due to its knowledge management partnerships with key platforms, the most recent one being Amazon's Alexa. That businesses can control the answers that Amazon Alexa gives about them through Yext’s knowledge management services made the markets positive of the stock and took it to a new high. However, the recent result has certainly shown a realistic picture of Yext’s fundamental weakness.
The company has been consistently burning cash, and the margin of net loss has been around 38%, which is high. The worst part is that this margin of losses has been growing over the years and making the company drift further away from its break-even. The company has not been funded through any form of debt, so the value destruction has been faced only by the equity shareholders, with a return on equity of -102.96%.
There is no doubt that the partnerships of Yext with the likes of Amazon and Google, coupled with its current revenue growth, are big positives. But they do not justify an EV-revenue ratio of 6.87 and a price-book ratio of 21.58. Another point that is worth highlighting about Yext is that in the past year gurus have been reducing their stake in the company. Leon Cooperman (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have completely sold out their stake in Yext and Ron Baron (Trades, Portfolio) also reduced his stake in September when the stock was at a high. It is evident that none of them expect the stock to achieve these valuations in the near future.
Conclusion
Yext is another classic tech stock with plenty of promise to deliver solid revenues but with a poor focus on the bottom line. In the end, investors have to remember that if the company is expected to continue making more and more losses, it will require financing to keep its operations going. Additional financing for a debt-free company like Yext comes through equity, which is bound to further dilute the value of the existing shareholders. Therefore, fundamental profitability is a very important factor.
After the consistently poor results, it is best for prudent investors to wait for the management to show some visible improvement in the bottom line and curb the cash losses before considering an investment in the long-term revenue prospects of the company.
Disclosure: No positions.
