Nextdoor: Market Becomes Unkind

view original post

Cindy Ord/Getty Images Entertainment

Despite another strong quarter, the market is dumping Nextdoor Holdings (NYSE:KIND) again. The company remains highly unprofitable at the wrong time despite generating the type of growth warranting strong investor interest. My investment thesis is ultra Bullish as the market throws away this growth stock due to fears over ongoing losses.

Another Big Quarter

The stock has fallen below $3, yet Nextdoor just reported another quarter with nearly 50% revenue growth. The below chart highlights the main reasons the stock is falling to these lows despite strong results meeting forecasts.

Source: Nextdoor Q1’22 shareholder letter

Nextdoor grew revenues 48% YoY, but revenues were down sharply from the Q4’21 level. Despite the seasonal issue with advertisers, the market isn’t taking any chances here.

In addition, weekly average users (WAU) only grew 0.9 million sequentially. The market wants to find reasons to dump a stock and limited sequential growth is a good reason to exit a stock, though Nextdoor grew users 33% over last Q1 and the growth rate has expanded ever since hitting a low of only 5% growth back in Q2’21.

The adjusted EBITDA plunged to a loss of $20 million. The company guided to a large loss during the seasonally weak quarter. Even worse, the 2022 adjusted EBITDA margin is still targeted at (18%) when the market wants companies generating positive margins. Nextdoor does plan to cut the full-year EBITDA margin loss by 500 basis points over the 2021 level with the important 2H quarters cutting losses from last year to offset the large EBITDA loss start for the year.

The market doesn’t care that Nextdoor guided to similar numbers when reporting Q4’21 results on March 1. The original revenue guidance was $252 million, but the neighborhood social media play had increased guidance to $254 to $256 million. Technically, the company is only pushing the low end of guidance back to the original range, yet the stock is down 70% from the SPAC price where funds were raised.

The stock market is in no mood for even simple adjustments to guidance no matter the value opportunity for the individual stock. Nextdoor is early in the innings of monetizing the platform with a minimal ARPU of just $1.39 in Q1’22.

Over time, the focus on local ads should allow the company to monetize users at far higher rates than other social media platforms. Meta Platforms (FB) generates quarterly ARPU in the $10 range with the US & Canada up at levels topping $50. Nextdoor is far more focused on the high ARPU markets.

Users on Nextdoor offer a better customer base for which SMBs can target users in the local neighborhood with high intent to use a service than users on other social media sites with limited intent to purchase interest. The company just launched Nextdoor Ads for SMBs offering a self-serve experience to onboard smaller customers and offer additional ad types to expand ad purchases.

Source: Nextdoor Q1’22 shareholder letter

The small social media company has a long way to go to match the ad effectiveness of a platform like Facebook, but the company has the users to warrant substantial increases to monetization metrics.

Left In Junk Heap

As with a lot of former SPACs, the related stocks are left for dead now. The stock has a minimal market valuation of $1.1 billion while the cash balance is a massive $0.7 billion leaving the stock with an enterprise of just $0.4 billion.

The market is wisely selling off high multiple stocks producing major losses at a risk of diluting shareholders to raise additional capital. Nextdoor doesn’t fall into this scenario with the strong balance sheet from completing the SPAC deal back up at $10.

Nextdoor has the cash to continue investing in product development and expanding the ad product. A weak economy could definitely impact growth rates, but the stock has an EV near the current 2023 sales target of $341 million. The social media platform gave limited reasons to where the business would fail to meet these targets, but management was cautious on guiding much above 33% growth for the year.

Data by YCharts

Takeaway

The key investor takeaway is that the stock market was unkind to Nextdoor following Q1’22 results. The social media site continues to execute on goals and the company has the balance sheet to handle years of investment when capital becomes hard to raise. The ad market could definitely contract in a tough recessionary scenario, but Nextdoor has plenty of catalysts for long-term goals. The stock shouldn’t sell in the junk heap, which is what an EV/S multiple of 1x suggests.