Your “Yext” Value-Based A.I. Investment By Ashmit Bhattacharyya & Rutvij Thakkar
In the era of growing small businesses and increasing brand presence, the internet appears to be a vast and difficult space to make a lasting impression on from a small business perspective. Small businesses may have insufficient entries in Google, Yahoo, and other search engines, where clients are likely to discover them. This is significant for these businesses, because if their information is inaccurate or missing, it will turn away potential customers. Yext, a growing New York based company under the ticker YEXT, provides a solution for modifying these entries and increasing the internet presence of small businesses. YEXT shows promise as a growing long term stock due to its unique product line and hopeful financials.
In a sense, Yext is like Google but for enterprises that require more depth than Google can provide for them, and they actually use Google to help companies advertise and gain traction with consumer base using their APIs that are integrated with consumer platforms. The advertising industry is huge, as we’ve seen Google, Facebook, and Snapchat dominate simply off reaching consumers, and collecting their data. Yext bridges the gap between businesses and unstructured data of potential consumers and existing consumers, setting them up in a multi-billion dollar industry expected to continually increase for the future.
Their main product line includes Answers: a search engine, Listings: an advertising tool to get your company’s products onto multiple platforms, Pages: a tool that helps get your business at the top of every location search, Reviews: which helps you engage with customer feedback, and Knowledge Graph/Analytics which helps business owners see their customer interactions with their webpages and other online presence. Websites used to be everything for a business but now a business requires presence across multiple platforms and integration with every search engine, map, or social media. The more a business’ online presence is spread the more analytics you need, and Yext is the amalgamation of the entire business’ internet presence. This cloud-based software is easy to use, and it’s used by several reputable companies; including huge fast food chains, travel companies, car manufacturers and even banks.
Yext solves the problem of particular consumer questions and connects the respective business with precisely what the consumer was looking for. Specific questions such as “wealth advisor near me who specializes in healthcare” (an example they used in their past annual report) will become increasingly easier to answer with the newest developments in Artificial Intelligence. The control of the ever-changing facts of a business are what enable it to spread its sales. Up-to-date and relevant information on every nook and cranny of the web has become a necessity, as convenience has become the most necessary commodity. Poor site experience is a huge detractor for the large majority of shoppers, and if businesses are able to retain this potential loss in customers they’d be willing to pay anything. Managing an online presence using one dashboard is going to be a very desirable service for all businesses, regardless of size. Yext links all the chains together in the cloud, for Google Assistant, Alexa, Siri, and even the Chinese WeChat, all services which are improving more and more in terms of their search capabilities and they’re growing in popularity.
The product or service a company provides is the most crucial aspect of a company’s success, and YEXT seems to deliver on its product. The solution requires a subscription that can be priced according to a business’ specific needs. YEXT does not seem to have as many recognizable competitors. Its main competitors, Birdeye and Chatmeter, are both private companies with no real news about an IPO anytime soon, while YEXT has been public on the NYSE for three years. From this perspective, YEXT maintains an advantage over its competitors due to it being more recognizable and financially stronger due to its valuation reaching over a billion after going public. However, a reported issue with the product is that listings may go back to normal after a contract with a small business terminates. This is justifiable, because a small business could use the service for a month and reap all benefits. To improve this aspect of the solution that is controversial, maybe a potential solution could be negotiating a minimum period the contract has to be active in order for listings not to revert when it is terminated. Despite this drawback, Yext Inc. has innovated in this niche field and is emerging as a frontrunner in back-end listing modification.
Now that we have established that YEXT will likely be a frontrunner in structuring advertising data, we need to establish WHY this is a growing industry, as YEXT is heavily dependent on the growth of eCommerce and other forms of online and in person business. Without businesses, Yext will have no source of revenue so the expansion of commerce is critical to Yext’s revenue. Fortunately, eCommerce and small businesses are trending upwards, indicating a healthy future for YEXT. One way to examine if this industry is growing is to analyze advertisement spending, as more online businesses directly correlates to more money spent on advertising. The graph below regarding digital advertising spending clearly illustrates that online business is growing, with advertisement spending nearly doubling over the six years.
Another way to gauge the health of the industry YEXT is heavily dependent on is to take a look at the growing amount of transactions online. Transactions correlate to greater revenue generated via the internet and thus a greater need for YEXT to introduce smaller businesses to this growing market. The chart below from Statista portrays the growth of Mobile POS payments and Digital commerce over seven years, almost tripling in total volume.
Once again this looks promising for YEXT, as their clients are primarily located in this sect of online business due to accurate data going hand in hand with more online sales. Furthermore, YEXT will be a solid pick for investors in the long term due to its growth along with a growing industry and its solid product. If you are interested in delving deeper into why eCommerce and online payments are growing, be sure to check out the Paypal/Square DD as well.
On their last 10k, Yext reported the following for their most recent compiled income statement:
As you can see for the top line, there are plenty of positive signs. Revenue has grown by over $50M yearly from 2016 to 2019, and from 2019 to 2020 revenues grew by about $70M. So the indicator when it comes to sales is overwhelmingly signaling that this company is well-positioned to grow, especially in the near future. Gross profit margins are also great as the cost of the product itself isn’t much. The potential issues in the income statement show up as you go toward the bottom line. Operating expenses far outweigh gross profits so net profits are -30% despite gross profit margins being 75%. Breaking down Opex, you can see that about ⅔ of them go towards sales and marketing, which isn’t necessarily a bad thing as distributing your product can be a huge future investment, but it can be concerning for investors who want a product that “sells itself”. Despite this rather arbitrary requirement, the sales growth justifies the spending as it’s obviously working and eventually revenue should far outpace selling expenses.
In their 10k, they state that their sales expenses primarily had to do with more wages and a higher headcount of employees. As the company’s operations grow, they’ll need more employees to run it in an aggressive growth stage. Despite the constant revenue growth, the stock price has been diluted due to more underwriting in 2019. It may take a while to recover from all the extra supply that was brought into the market, but even if we see more financing in early stages, I personally wouldn’t be concerned as that’s a normal course of action for younger companies.
A quick look at the financials indicates that YEXT is improving as a company over each year. Due to their relatively high amounts of investment, the EPS for the company has remained negative. The EPS was also a lot worse in previous years. However, don’t let this negative metric fool you, as the EPS has been trending positive since the first quarter of 2020. This indicates significant improvement, especially since the EPS hasn’t been improving much prior to 2020. The increase of the EPS is also supported by the increase of change in working capital from $2M to $4M. As for the rest of the cash flow statement, the negative values are primarily caused by the expansion of operations. This expansion of operations is indicated by the increasing total assets, which means that YEXT grew their assets via larger operations. Although the numbers may be negative temporarily, the expansion of operations allows YEXT to generate more revenue from operations and hopefully turn the direction of cash flows around. Constant reinvestment back into the company is a good sign as it indicates owner and shareholder confidence in the future prospect.
Finally, delving into the 10Q provides reassuring prospects for the future health and growth of YEXT as a company. Looking at the breakdown of individual risks, YEXT looks to be relatively secure in the future. The main risks of the company are internal, and are not influenced by factors such as inflation and foreign currency fluctuations. To some, YEXT may appear risky due to its limited financial history and potential unprofitability due to it being relatively new. However, these risks will ultimately be insignificant, as the expansion of operations will soon be recovered by profits if YEXT maintains its current scale of growth that it has achieved in 2020.
In conclusion, YEXT will be a good pickup for many investors because the enterprise solutions industry overall has done very well, and Yext’s solutions are definitely a foray into the future of artificial intelligence combined with traditional SaaS. If you compare Yext to another company that has a similar premise, Twilio, you can see that Yext’s price/sales ratio is only 1/7th of Twilio’s. Of course, Twilio is far more overvalued and has had better sales growth than Yext this past year, but Yext isn’t a slouch in sales growth either as we’ve seen. Plus, they have far more potential than Twilio does as we’ve seen with their relatively small market cap of $2B. Both companies offer AI-based enterprise solutions, but Yext is just as good if not a better solution for the future as it has more applicability through a variety of businesses. If you want to see similar growth to what we’ve seen in company’s such as Twilio but feel as if you’ve missed the bus, don’t worry: we’ve got the pick for you. Yext is still 25% off its 52-wk high, and they are sure to surpass it with just one or two blowout positive ERs which will be in the books soon.