Yext’s 38.2% return over the past six months has outpaced the S&P 500 by 22%, and its stock price has climbed to $8.83 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Yext, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Yext Will Underperform?

Despite the momentum, we're sitting this one out for now. Here are three reasons why YEXT doesn't excite us and a stock we'd rather own.

1. Weak ARR Points to Soft Demand

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Yext’s ARR came in at $446.5 million in Q1, and over the last four quarters, its year-on-year growth averaged 9.1%. This performance was underwhelming and suggests that increasing competition is causing challenges in securing longer-term commitments.

2. Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Yext’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between Yext’s products and its peers.

3. Shrinking Operating Margin

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Analyzing the trend in its profitability, Yext’s operating margin decreased by 3.4 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Yext’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 6%.

Final Judgment

Yext falls short of our quality standards. With its shares beating the market recently, the stock trades at 2.6× forward price-to-sales (or $8.83 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d recommend looking at the most entrenched endpoint security platform on the market.

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