Yext Q1 Earnings: Bold Move To Use Cash For Acquisition Ambition (NYSE:YEXT)

Investment Thesis

Yext’s (NYSE:YEXT) bull case was summed up as a very strong balance sheet. And yesterday, management announced that it’s seeking to deploy the bulk of its balance sheet’s cash to make a large needle-moving acquisition. So far, the stock is down more than 10% on this news.

In other words, Yext will see some inorganic growth once this acquisition is completed, but beyond that, is there enough here for investors to get bullish on Yext?

I don’t believe so. Therefore, I’m rating this stock a sell.

Rapid Recap

Back in October, I said,

Getting right to the point, this stock is currently priced at 21x this year’s EPS, a multiple that might be too high for a business that could end up delivering no top line growth next year. This means that without top line growth, there’s only so far Yext can cut back costs before its EPS also stops growing.

Since I wrote that analysis, the stock has meandered lower, which, including the premarket drop, is now down 25% versus the S&P500 which is up more than 20% in the same period.

In other words, in hindsight, I was right to downgrade this stock. And now, with another 6 months of results, I’m rating this stock a sell. Here’s why.

Yext’s Near-Term Prospects

Yext helps businesses manage their online presence and customer interactions. It provides tools for companies to ensure that their information is accurate and easily found across various digital platforms, like search engines and social media. Yext also helps businesses engage with customers through features like review management and local marketing.

In short, Yext specializes in maintaining consistent business information and improving local search visibility.

Moreover, Yext’s acquisition of Hearsay Systems positions it to significantly enhance its digital presence and client engagement capabilities, particularly in the financial services sector. By combining Hearsay’s client engagement solutions with Yext’s digital presence platform, the company aims to offer a comprehensive suite of tools to manage the customer journey. This strategic move is expected to provide Yext’s customers, which include some of the world’s largest financial institutions, with capabilities to connect and communicate with clients effectively.

That being said, one challenge that Yext faces in the current economic environment is marked by stringent budget constraints among clients. The financial pressure on Yext’s customers, coupled with increased scrutiny on IT and marketing expenditures, has led to slower demand conversion and challenges in renewing contracts at previous levels.

Given this context, let’s now delve into its financials.

Fiscal 2025 Revenue Growth Rates Downwards Revised

Previously, Yext was guiding towards $400 million of revenues for fiscal 2025. Now, this guidance has been downwards revised by a small amount, to $396 million at the high-end.

Needless to say, this downward revision is not a significant amount. But when Yext barely met the low end of its own fiscal Q1 2025 revenue guidance, plus investors are now facing a downward revision of its full-year guidance, altogether this implies that its prospects don’t appear to be improving any time soon.

Consequently, investors are eyeing up a fiscal year with no growth, in the best-case scenario. Or perhaps, if the environment deteriorates even more, Yext will see its revenue shrink this year.

In sum, this isn’t a promising setup for fresh capital to get involved with this stock. Particularly given that its valuation isn’t exactly in the bargain-basement, something that we consider next.

YEXT Stock Valuation — 7x EBITDA

Yext holds approximately $100 million of cash and cash equivalents on its balance sheet and no debt. This cash sum is after its acquisition of Hearsay is factored in. Note that I’ve presumed that there are some additional sums associated with this acquisition for performance targets being met.

This means that including the premarket drop of 10%, nearly 15% of Yext’s market cap is made up of cash. Needless to say, this is a bullish factor that investors will be willing to give some weight to. That being said, this cash only has some value if management is able to shrewdly deploy that capital into something that is accretive to the business.

Or perhaps, another way to look at it could be that Yext has made its move already. A very bold move to acquire Hearsay. A business that is barely breaking even on its cash flow line. Although management hasn’t yet provided any formal guidance on what sort of growth investors could expect from the combined business, I believe we can surmise that Yext has bought itself another year of inorganic growth rates. But is that truly compelling enough to pay approximately 7x EBITDA for Yext? A business with no organic topline growth rates? I don’t believe this makes sense. Therefore, I rate this stock as a sell.

The Bottom Line

In conclusion, Yext’s recent announcement regarding its intention to utilize the majority of its cash balance for a significant acquisition has negatively surprised me.

While this move may result in some short-term inorganic growth for the company, questions linger regarding the sustainability of its bullish prospects.

Moreover, downward revisions in revenue growth projections for fiscal 2025 raise concerns about the company’s trajectory. Although Yext holds a substantial cash reserve, amounting to approximately $100 million and remains debt-free, its recent acquisition strategy and uncertain growth outlook prompt me to be skeptical about its valuation.

With the stock trading at approximately 7x EBITDA and facing the prospect of no organic revenue growth in the near term, it makes sense to call it a day on Yext.