Yext: A Reasonably Priced SaaS Name?
I tweeted this out on Saturday:
Why I like $YEXT: – No competition – EV/Rev of 5.12 – High gross margins – Huge value proposition for customers — Brett Schafer (@CCM_Brett) October 20, 2019
It got a decent amount of engagement, so I thought I’d go deeper on each bullet point and explain why Yext is one of my favorite SaaS stocks right now.
But first, since they are not a household name, let’s talk about what Yext does. A business can use Yext to make sure its information and listings are indexed correctly across different digital platforms (think Google Maps, Facebook, etc.). This is very important for businesses so customers can get accurate information about their products/services in a timely manner. If you’re still confused about what Yext does for other businesses, check out their products page here.
Okay, let’s talk about the stock.
When searching for “Yext Competitors” on Google, it was tough to find any recognizable competition. According to Owler, their highest-ranked competitors are Synup, Advaiya, and Uberall. All three of these companies have less than $25 million in annual revenue, which is 10x less than Yext.
Why does this matter? Because when giant corporations want to index their digital information, there is only one company (Yext) they can use in confidence.
The downside about Yext is they don’t have a giant addressable market. But with a market cap of only $1.6 billion and high margins, they don’t need to be bringing in $10 billion annually to provide value to shareholders.
Low Valuation for a SaaS Stock
An EV/Rev (enterprise value-to-revenue, similar to price-to-sales) of 5.12 might seem high in a lot of industries. But in the high-growth SaaS industry? That is dirt-cheap.
Granted, Yext is only growing sales 30-35% annually, which is a lot slower than other software stocks trading in the high teens and ’20s. However, with 75% gross margins, recurring revenue, and decent cash flow numbers (they are really close to break-even), I think Yext will command a higher multiple in the coming years.
I also believe, unlike some of the faster growing SaaS names, that Yext can sustain 30-35% sales growth for the next decade. Being patient and thinking long-term is an advantage individual investors have over Wall Street. Make sure to use it wisely.
High Gross Margins
A high gross margin (GM) is important because it shows how high a business’s net and operating margins can be at scale. With Yext, they had 75% GM’s in 2018, which was up from 58.6% in 2015. If they can sustain a 75-80% GM number and continue growing sales 30%+, they could easily bring in $500 million+ in operating income in five years.
Now, just because a company has high GM’s doesn’t guarantee they will get to high operating margins. That’s the risk you’re taking when investing in a historically unprofitable growth stock. I believe Yext has a good chance of achieving 30-40% operating margins when they scale, but that does not mean they will actually get there.
Providing Value to Customers
This is a big one, but really more of an anecdote than statistical or fundamental analysis. Indexing digital information correctly across the dozens of relevant internet platforms is vital to a consumer-facing brand. Yext can save businesses time and money by providing this service for them. When working with Yext, companies’ incentives are aligned. This can lead to long-term, satisfying partnerships.
That about sums up, without getting too deep into the numbers or earnings projections, why I like Yext. I believe it is a sustainable business trading at a discount, and think it could be a big winner over the next decade.
Disclosure: The author is not a financial advisor, but may have an interest in the companies discussed.