Few companies can boast a trajectory as tumultuous as Yext (NYSE:YEXT) in the dynamic landscape of the stock market. On September 7, 2023, Yext sent shockwaves through the financial world when it reported a staggering 23% drop in its stock price, plummeting below the $7 mark. This sudden decline comes on the heels of a year that initially appeared promising, with Yext's stock soaring by 39%. Yet, despite the company meeting or even slightly exceeding analysts' expectations in its latest earnings report and raising its guidance, it seems that investors are growing increasingly cautious about the future potential of the company. In an environment where AI is both the buzzword and the future, is Yext a hidden gem or a stock to avoid? Let us take a closer look at Yext's business model and whether now is the time to invest or jump ship.
What Is Yext's Offering?
Yext, Inc. specializes in the organization of business information to provide comprehensive answers to consumer inquiries. Their primary platform, the Yext platform, is cloud-based and serves as a dynamic tool for businesses in North America and international markets. It empowers customers to take charge of the facts associated with their enterprises, including the content on their landing pages, control over consumer reviews, and the ability to keep their information up-to-date. Yext offers this control through an extensive knowledge network, encompassing approximately 200 maps, apps, search engines, intelligent GPS systems, digital assistants, vertical directories, and social networks. Through this platform, Yext enables its clients to centralize, manage, and oversee various data fields crucial to their businesses, ranging from essential store information such as names, addresses, phone numbers, and holiday hours to more specialized professional details like headshots, specialties, and educational backgrounds. Additionally, Yext helps manage job-related information, including titles and descriptions, as well as FAQs and other pertinent content. Their services are deployed across diverse industries, with a notable presence in healthcare, retail, and financial services.
Yext's Q2 Progress – Was It Really So Bad?
During Q2, Yext achieved results that either met or slightly exceeded their expectations. They reported revenue of $102.6 million, a non-GAAP EPS of $0.07, and $11.8 million of adjusted EBITDA.
In terms of Annual Recurring Revenue (ARR), Yext experienced a 3% year-over-year growth, with direct ARR increasing by 5%. The company saw improvements in sales productivity and execution, as well as progress in their end-to-end demand generation efforts. Their go-to-market transformation, although still a work in progress, showed promising signs with increased total and qualified pipeline production.
The mid-market team, focusing on smaller enterprise customers, continued to execute well, with results consistent with the prior quarter. Although this momentum is expected to extend to larger enterprises, the current macroeconomic environment may delay this transition due to factors such as customer buying trends, budget scrutiny, and extended decision-making processes.
Interest in Yext 's digital experience solution was growing, leading to measurable increases in the total pipeline year-over-year. However, the management noted that larger enterprise customers were yet to reaccelerate their buying trends, likely due to ongoing budget constraints and extended sales cycles.
Furthermore, budget scrutiny and caution were impacting every renewal, resulting in more RFPs, larger buying committees, and procurement engagement. These challenges, along with the decisions made to deprioritize direct SMB sales and the Japan market, were expected to continue affecting ARR growth and retention throughout the fiscal year.
On a positive note, Yext observed encouraging signs from their reseller channel, although there was a slight drop in ARR attributed to a single customer churn from an M&A event. Looking ahead, Yext's management remained cautious about the back half of the year due to macroeconomic uncertainties. They announced an increase of $50 million in their share repurchase program, showcasing their commitment to generating value for shareholders.
Key Takeaways – Why The Negative Perception & Is It An Investment Opportunity?
Source: Yahoo Finance
We can see the massive post-earnings plunge in Yext's stock in the above chart. The company has the potential to become a significant player in the AI landscape. However, its struggle to regain historic growth rates has raised concerns among investors. Yext's Q2 results have clearly left Wall Street unimpressed and the tepid 2% year-over-year revenue growth has left many underwhelmed, especially considering the high expectations surrounding AI-driven companies. Yext's third-quarter outlook anticipates adjusted earnings ranging from 6 to 7 cents per share on revenue between $101.5 million and $102.5 million. For the full year, it forecasts adjusted earnings between 29 and 30 cents per share on revenue ranging from $405 million to $407 million. These numbers do not justify a very high valuation multiple. It is important to note that Yext is currently trading at an Enterprise Value/ Revenue multiple of 1.06x which sounds reasonable for a company with a low-single-digit top-line growth. Hence, we believe that Yext has a very limited upside and could easily be avoided at current levels.
