Hey Fools,
Just came across YEXT as an investment idea. An initial glance shows there is a lot to like, though the grown rates might not be high enough for some of you.
What they do
Invented a new category that they call “Digital Knowledge Management”. Basically, they help companies
gain control of their branding across the internet by monitoring hundreds of public facts that appear in maps, applications, search engines, voice assistants, directories, social networks…etc. This helps companies ensure that their messaging and information is correct across popular platforms like Google Maps, Yelp, Facebook, Instagram, Foursquare, Amazon Alexa…etc. That’s important because there currently isn’t an easy way for companies to keep tabs on and manage all of this third-party data about them. YEXT helps fill that gap.
What’s super interesting here is that the company doesn’t think it has any direct competition. They list their primary competitor as "businesses that choose to handle digital knowledge management in-house using manual processes.
They operate using a SaaS model. Here are the recent numbers:
Revenue:
Fiscal 2019: $228 million (+34%)
Fiscal 2018: $170 million (+37%)
Fiscal 2017: $124 million (+38%)
Dollar-based net retention rate
Fiscal 2019: 110%
Fiscal 2018: 109%
Fiscal 2017: 119%
Net income:
Fiscal 2019: ($74.8 million)
Fiscal 2018: ($66.6 million)
Fiscal 2017: ($43.2 million)
So, growth is good, but not off-the-charts stellar. The net loss is growing, too, though the company recently became FCF positive.
Here’s how the company stacks up on my quality checklist:
**Metric (score potential) YEXT**
**Financial:**
Financial Resilience:(0 - 5) 5
Gross Margin: (<50%, 50% to 80%, >80%) (0 - 3) 3
Returns On Capital: (Low, Average, Rising)(0 - 3) 0
FCF: (Negative / Positive / Positive and growing fast) (0 - 3) 3
EPS: (Negative / Positive / Positive and growing fast) (0 - 3) 0
**Moat:**
Network effect (None / Weak / Strong) (0 - 15)
Switching costs (None / Weak / Strong) (0 - 15) 15
Durable Cost Advantage:(0 - 15)
Intangibles: (0 - 15)
Moat Direction: (Narrowing / Stable / Widening) (0 - 5) 5 (more services)
**Potential:**
Optionality:(0 - 7) 4
Organic Growth Runway: (G.D.P. / 2x or 3x G.D.P. / 15%+) (0 - 4) 4
Top dog And/Or Industry Disruptor:(0 - 3) 3
Operating Leverage Ahead?(0 - 4) 4
**Customers:**
Acquisition:(0 - 5) 2 (expensive to onboard)
Dependence: (0 - 5) 5
**Company-specific factors:**
Recurring Revenue: (None / Some / Tons) (0 - 5) 5
Pricing Power: (None / Inflation / Tons) (0 - 5) 5
**Management & Culture:**
Soul in the game: (Founder/Family Run/Long Tenured CEO) (0 - 4) 4
Inside ownership: (None / Modest / Very High) (0 - 3) 3
Glassdoor ratings: (0 - 4) 4
Mission statement? (Simple, Inspirational, Optional-able) (0 - 3) 2
**Stock:**
Performance Vs. S&P 500:(0 - 4) 3
Shareholder Friendly Actions:(0 - 3) 0
Consistently Beats Expectations?(0 - 4) 3.5
**Pre Gauntlet Score: 82.5 (excellent)**
**The Gauntlet**
Customer Concentration:(-5 , -3, 0) 0
Industry Disruption:(-5, -3, 0) 0
Outside Forces:(-5, -3, 0) 0
Big Market Loser: (-5, -3, 0) 0
Binary Event: (-5, 0) 0
Extreme Dilution: (-4, -2, 0) -4 (10% dilution in fiscal 2019)
Growth By Acquisition: (-4, -2, 0) 0
Complicated Financials (-3, 0) 0
Antitrust Concerns: (-3, 0) 0
Political Risk: (-3, -2, 0) 0
Currency Risk:(-2, -1, 0)
**Final score: 78.5 (very good)**
For perspective, the highest score possible is a 100, and the lowest score possible is -44.
YEXT’s 78.5 is very good, and it will likely head higher over time after it flips to profitability.
YEXT is an interesting business for sure, and I love that it is founder-led, gets rave reviews from employees, is growing revenue at 30%+, and appears to face no competition.
The high stock-based compensation, growing net loss, and moderate dollar-based net retention rate give me pause right now, but I think this business is very interesting.
Brian
*******
FAQ:
Is there a spreadsheet that has all of your data? Yes, but I do not want to make it publicly available. I will post on a company by company basis to the boards. Feel free to follow me if you want to see my most recent rankings.
**What companies have received the highest scores so far?**Alphabet (88), Paycom Software (86), MercadoLibre (85), Amazon (85), HubSpot (85), Adobe (84), Paylocity (84), and Q2 Holdings (84)
What data do you have to show that this methodology works? Very little. I’m currently thinking through ways to measure its long-term effectiveness, but my gut feeling tells me that it will help me pick better stocks.
What about valuation? This data is only designed to help me determine business quality, which is far more important than valuation. Whenever I personally make buy/hold/sell decisions, I always consider valuation too, but I think it is small “f” foolish to not buy a truly great business just because of valuation concerns.