Not even a double-beat earnings report with a solid forward guide could save shares of digital search tech platform Yext (NASDAQ:YEXT) from falling amid the recent tech sector meltdown. Yext reported stellar fourth-quarter numbers on Thursday, but YEXT stock still dropped more than 10%. Shares of the online brand management firm are now down 25% in just two weeks.
That’s a steep drop … but it’s also a great buying opportunity into an emerging tech stock with great potential.
To be clear, I’m not saying YEXT stock will reverse course right now and rebound to $20. The tech sector selloff is a bloodbath, and bloodbaths like this tend to take some time to shake out.
But Yext is a promising company with an interesting and exceptionally value-additive technology. In fact, it should actually see increased demand in 2021-2022 as the physical economy reopens and consumers go out and do more things. The near- and long-term earnings potential here is promising.
Relative to that potential, YEXT stock is way undervalued by about 50% today.
That means that for long-term investors, this dip is a buying opportunity that could end with 50%-plus profits.
Here’s a deeper look.
YEXT Stock: Hammered on Short-Term Fears
YEXT has been hammered over the past few weeks because of fears related to a sharp rise in long-term bond yields. The basic thinking is that, as long-term yields rise, equity valuations will correct lower, because stocks and bonds are competing investment vehicles. So as bond yields rise, the required rate of return on stocks rises, too.
That thinking makes a ton of sense. And if yields were to rise forever, then I’d say growth stocks like YEXT stock will keep plunging.
But yields aren’t going to rise forever. Instead, it looks like the 10-year Treasury yield will max out around 2% over the next few years.
Here’s the thinking.
Historically, the 10-year Treasury yield has very closely tracked the sum of the 3-month Treasury yield (a proxy for inflation which the Fed controls with its target interest rate) plus real GDP growth. This relationship is unmistakably strong. Importantly, the 10-year yield has historically never surpassed the 3-month yield plus real GDP growth unless during a time of significant economic contraction (and therefore, negative GDP growth).
The Fed has reiterated multiple times that they will not move on interest rates anytime soon. Thus, the 3-Month Treasury yield will remain near-zero for the foreseeable future. Real GDP growth is expected to jump to 4% this year in a sharp “bounce-back” year. But normalizing out for Covid-19 noise, real GDP growth in 2022 and after is expected to hover around 2%.
Thus, normalized, the 10-year yield should settle around 2% and remain there for most of 2022 and 2023. We are at 1.5% today. By my math, then, yields have another 50 basis points to go over the next 24+ months. That’s a slow and steady grind higher.
To that end, I think we’re close to the end of the surge in long-term yields. Once the bond market calms down, I fully expect growth stocks like YEXT stock to bounce back.
Yext’s Fundamentals Remain Healthy
Ignoring interest rate noise for a second, YEXT stock is still supported by healthy long-term fundamentals.
In short, Yext is an online brand experience management platform that enables brands to provide consistent and perfect answers to their customers’ questions online — an increasingly important aspect of a brand’s broader CX.
Specifically, Yext has created a streamlined platform, dubbed the Search Experience Cloud, that has partnerships with various listing location sites, like Facebook, YouTube, Google, Yelp, Apple Maps, so on and so forth. Brands post and update their public information once in Search Experience Cloud. Seconds later, that same information is published across the whole Knowledge Network (or everywhere the brand has a listing).
It’s a streamlined way for brands to establish clear, consistent communication with customers across the multi-channel, fragmented internet universe. Needless to say, that’s a big deal. U.S. consumers spent $14.8 TRILLION on products and services in 2019. More than 90% of those consumers started their shopping trip with an internet search.
In other words, by eliminating listing inaccuracies, Yext is solving a multi-trillion-dollar opportunity cost problem for brands across America.
That’s just the tip of the iceberg. The company also offers various other services, such as Yext Reviews (which allows companies to monitor and respond to reviews across the Knowledge Network, all in one place), Yext Pages (which leverages machine learning to optimize landing pages and put brands at the top of relevant search results), and Yext Analytics (which gives brands a centralized platform to analyze site performance data).
All in all, Yext provides a suite of tools to help brands manage their online presence, which is of paramount importance in today’s internet dominated world.
These are the solid fundamentals underpinning YEXT stock. Nothing about them has changed in previous weeks. If anything, the fundamentals have actually improved, since as consumers go out and do more things, they’ll be searching for more things online, and that will lead to increased demand for Yext’s information management tools.
Yext Stock Has 50%+ Upside Potential
I cannot tell you exactly when the sell-off in Yext stock will end. But, what I can tell you is that — even after factoring in higher rates — Yext stock is significantly undervalued relative to the company’s long-term earnings growth potential.
As online information management becomes increasingly mission-critical to a brand’s CX over the next few years, Yext’s customer base and average spend per customer will both increase steadily. I see this company growing revenues at a 10%+ pace over the next 10 years.
At the same time, this is a very scalable software business model with high profit margin potential. Long-term, I see EBITDA margins expanding to around 30%.
Inputting those assumptions into my valuation model, the output yields a fair value for YEXT stock of about $20. That’s more than 50% above where shares trade today.
To be clear, YEXT stock may not rebound back to those levels right away. But the fundamentals eventually and inevitably always win out. Thus, whenever this stock market bloodbath does end, I do think Yext stock will surge higher.
Bottom Line on YEXT
The tech sector meltdown has created multiple great buying opportunities for long-term investors. YEXT is one of the best stocks to buy amid this meltdown.
But it’s not the best growth stock to buy on the dip.
Instead, the best growth stock to buy today is a company that reminds me of a young Amazon. Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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