Yext Stock: Don’t Buy This Dead Cat Bounce (NYSE:YEXT)

The second quarter earnings season was a big boon for many underdog rebounding companies. Especially as the stock market is falling sharply from all-time highs due to growing recession fears, value stocks look increasingly attractive. But caution and careful stock selection is of the utmost importance: needless to say, not all failed companies have the ability to overcome their struggles.

Yext (NYSE: YEXT) is a stock that has experienced, in particular, unexpected growth. The software company, which describes itself as a “knowledge graph” for enterprises, surged more than 25% after reporting stronger-than-expected results in Q2 (although even that growth only managed to reverse YTD losses , and the stock has been roughly flat since January). The question for investors now is: Is Yext’s rally sustainable or is this company still on a collision course?

I last wrote a bearish note on Yext in June, when the stock was trading in the mid-$5s. I wasn’t expecting the post-T2 rally, but the incremental news from Yext doesn’t make me feel more bullish on this stock either.

Broadly speaking: Investors appreciate that Yext’s direct ARR (that is, sales to customers by Yext’s own sales force and not reseller partners) has returned to growth after a hiatus of more than a year. At the same time, however, overall ARR is still declining.

We should also consider that Yext’s original product, Listings (a tool to help businesses manage their location data on platforms like Yelp and Google Maps), has tremendous exposure to businesses like retail stores and restaurants . We’ve already heard dire news from Yelp and other companies that focus on this vertical that these companies fear a decline in consumer spending and thus cutting back on their spending: Finally, another factor affecting rates of retention and Yext’s ability to obtain new deals.

Here are all the basic red flags I see in Yext:

• Yext has seen persistent declines in ARR and customer retention. Yext continues to see customer churn and declining ARR, a situation that may worsen with declining macroeconomic conditions.
• Alternatives, including DIY, abound. A quick scan of Yext’s online product reviews suggests that its features can be built in-house at a much lower cost.
• Yext’s guidance, especially on the bottom line, looks like stretch goals that will be difficult to achieve. The company expects adjusted EBITDA margins of more than 15%, even as its current margin profile is in decline. Redundancies can only help so much if the top line continues to deteriorate.

The only appeal to Yext (as well as the only real factor I see as an upside risk in this stock) is that it remains cheap, even after the post-earnings surge.

At current share prices of nearly $6, Yext has a market cap of $795.7 million. After deducting the $234.8 million in cash from Yext’s last balance sheet, the result enterprise value is $560.9 million. Meanwhile, the company continues to guide full-year FY24 adjusted EBITDA of $66-67 million, which represents a 16% margin over the company’s revenue range of $420-421 million.

This puts Yext’s valuation at 8.4x EV/FY24 revenues. Although seemingly cheap when the S&P 500 continues to trade at a forward P/E multiple of nearly 20x, I still consider Yext a value trap. A software company that struggles to grow, in my opinion, is a company that is accelerating toward obsolescence. Retention rates are still poor, signaling a weak product that has no core customer use. As such, I’d recommend staying on the sidelines here.

Download Q2

Let’s now go through Yext’s latest quarterly results in more detail. The Q2 earnings summary is presented below:

Yext’s revenue fell -4.6% y/y to $97.9 million. Despite the positive post-earnings reaction, the company slightly missed Street expectations of $98.2 million (-4.3% y/y).

The big problem for Yext, however, is the continued slide in ARR. Despite the company touting its direct channel ARR recovery, total ARR fell -4% y/y and lost ~$1M sequentially to end the quarter at $381.7M.

Now, Yext management believes that the decline in ARR for resellers is not fully representative of the company’s health, as customers who sign up through resellers often do not commit full amounts upfront (which would be reported in ARR). However, the company cites challenging sales cycles. CEO Michael Walrath’s comment on the Q2 shareholder letter:

While engaged reseller ARR was down about $2.1 million in Q2, we’re seeing a shift happening in this business. Prices in our Reseller channel differ from prices in direct offers. Because our partners have less visibility into the volumes required over time, most of our reseller deals involved a certain level of committed consumption (which we report as Reseller ARR) and a usage-based growth structure beyond that commitment . We see a lot of opportunities to strengthen and expand our Reseller business by focusing on more usage-based elements. This change puts pressure on ARR on the dealer, as a higher percentage of the expected value of a deal is uncommitted and therefore not included in ARR. While this impacted total ARR, revenue contribution from Reseller was flat from Q1.

I would like to take a moment and specifically address questions about the macro environment. There’s a lot to consider, and anticipating how businesses will manage their IT spending has proven to be a challenge in the software sector. We see many factors of uncertainty today. Interest rate environment, upcoming elections, geopolitical risks, questions related to a consumer recession. Our customers continue to be cost-conscious, and conversations with C-level customers and prospects indicate that the caution we’ve seen is likely to continue until the risks outlined above become clearer. Our current outlook anticipates flat to modest ARR growth this year despite the headwinds discussed above. The market remains unpredictable and we will update our outlook as things evolve.”

It’s also worth noting that Yext only reports a net revenue retention rate of 91% (compared to ~110s for many software companies), while gross retention was in the 80s. To me, this continues to indicates that Yext isn’t exactly a “sticky” product that customers will struggle to keep paying bills for when times are tough.

From a profitability perspective, Yext’s adjusted EBITDA fell -17% y/y to $9.8 million, representing a weak margin of 10% – 150 bps weaker than the year-ago quarter. We also note that YTD margins are also 10% and that the company, on a nominal basis, generated less than $20 million in adjusted EBITDA this year. Guidance calls for a midpoint of $66.5 million in adjusted EBITDA and a margin of 16%. The company expects EBITDA to improve from a combination of ARR improvements and sales productivity increases, as well as additional resource allocation and cost management – but as we have yet to see any evidence of this as ARR is declining, I really wouldn’t. the bank on Yext that faithfully executes these goals.

Key recommendations

Especially as we head into a potential recession that destroys Yext’s core clientele for its Listings product, I would be wary of the recent comeback from Yext, as recent history has shown us that the company is more than capable of suddenly disappointing us. . Given declining ARR, deteriorating EBITDA margins, and a looming recession that will squeeze IT budgets, I’d continue to sell Yext from here.