The tech IPO market is recovering as the hype around the Snap Inc (NYSE:SNAP) IPO and the success of MuleSoft demonstrate, and other tech companies are preparing to go public soon as well. On Tuesday, Yext released pricing details on its upcoming IPO, announcing that it plans to raise up to $105 million by selling 10.5 million shares at a price range of $8 to $10. Business Insider reports that Yext will trade under the NYSE under the label “YEXT.”
The rising tech market and the low share price makes Yext look like an attractive investment, and Yext offers a useful service by helping businesses manage their digital knowledge. But there are issues with its portended path to profitability which should hold this stock’s value back. Yext currently appears to be a decent, though not great investment for those who can get in at its current low share price, but investors should consider balking at a higher price until it can show how it intends to be profitable.
Managing Digital Knowledge
Businesses today are in a struggle to manage their online reputation, and that fight is made even harder by numerous third-party sites like Google Maps, Yelp Inc (NYSE:YELP), or Cortana. Inaccurate information or poor reviews can tank a business’s online reputation or sales, but businesses can have a hard time keeping track of these different websites or apps.
That is where Yext comes in. In its SEC filing, Yext purports to be a “knowledge engine” which “lets businesses manage their digital knowledge in the cloud and sync it to over 100 services.” Digital knowledge means information which a business wants to make publicly accessible, such as the menu for a restaurant or what health insurance a physician accepts.
By being a single hub through which a business can manage their social media information without having to go through each site individually, Yext makes things easier for both businesses and customers who can report and receive accurate information respectively. In addition to the benefits from accurate information, being listed on more third-party websites can increase a business’s ranking on Google (NASDAQ:GOOGL).
This is a useful service, and Yext has been able to build a strong client list including McDonald’s Corporation (NYSE:MCD), Ben & Jerry’s, AutoZone (NYSE:AZO), and Best Buy Co Inc (NYSE:BBY). The company’s revenue has grown from $60 million in the fiscal year ending January 2015 to $124 million in the fiscal year ending January 2017, and it claims to have growth potential both with further businesses in the United States and overseas.
Growth and Profitability Problems
But while Yext wants us to believe that it can help practically any business, it appears to be primarily a tool for larger corporations. Yext is not exactly cheap, as its Complete package costs $500 per year. Furthermore, if a company chooses to stop using Yext, Yext will revert all of the listing changes it made back to what they were before Yext. A cash-strapped business which only has half a dozen locations is probably not going to be interested in paying $500 per year to fix listings which it could handle itself given time. McDonald’s by contrast is a different story.
This places a damper on Yext’s growth potential, which is problematic given its lack of profitability. While Yext’s revenue may have grown astronomically from 2015 to 2017, its net losses increased from $17 million to $43 million in that same time frame. While there is nothing wrong or unusual about a tech company reporting net losses before going public these days, increasing net losses to that extent are a concern.
A Tentative Yes – but only for Some
There are certainly worse companies out there which have a share price that low, and Yext is a growing company which sells a useful service especially for large corporations. And while its potential with small business is probably limited, Yext is showing a good willingness to grow as is shown by its efforts to expand overseas.
But Yext needs to provide a better answer towards the question of how it will become profitable down the line. Yext is following on the coattails of Snap, which has seen its stock struggle since its IPO for similar reasons. But Snap could point to a long history of innovation and willingness to try new things as a reason for why it can turn around, while Yext cannot.
Rising confidence in the tech market as well as Yext’s low share price do mean that this company should perform very well out of the gate, and investors who can get in on the ground floor should attempt to do so. However, the vast majority of people who will have to wait until the initial boom is over to pick up Yext stock should remain cautious. Yext still has some time until its formal debut to explain its plans towards profitability, but investors who cannot get in immediately should wait and see before deciding to buy this stock for the long term.