Nextdoor's (NYSE:KIND) Q1: Beats On Revenue, Stock Soars

Full Report / May 07, 2024

Neighborhood social network Nextdoor (NYSE:KIND) reported Q1 CY2024 results exceeding Wall Street analysts' expectations, with revenue up 6.8% year on year to $53.15 million. Guidance for next quarter's revenue was also optimistic at $58 million at the midpoint, 2.8% above analysts' estimates. It made a GAAP loss of $0.07 per share, improving from its loss of $0.09 per share in the same quarter last year.

Nextdoor (KIND) Q1 CY2024 Highlights:

  • Revenue: $53.15 million vs analyst estimates of $50.81 million (4.6% beat)
  • Adjusted EBITDA: ($14.0) million loss¬†vs analyst estimates of ($19.6) million loss (beat)
  • EPS: -$0.07 vs analyst estimates of -$0.09 (22.2% beat)
  • Revenue Guidance for Q2 CY2024 is $58 million at the midpoint, above analyst estimates of $56.4 million (adjusted EBITDA guidance for the period also slightly ahead)
  • Gross Margin (GAAP): 81.2%, up from 80.1% in the same quarter last year
  • Free Cash Flow was -$13.65 million compared to -$14.94 million in the previous quarter
  • Weekly Active Users: 43.4 million, up 1 million year on year
  • Market Capitalization: $866 million

Helping residents figure out what's happening on their block in real time, Nextdoor (NYSE:KIND) is a social network that connects neighbors with each other and with local businesses.

Nextdoor Holdings was founded in 2008 in San Francisco and went public in 2021. The company aims to connect neighbors and local organizations (restaurants, local government entities) with each other so they can exchange information, goods, and services.

Nextdoor's primary product is a private social network for neighborhoods, and the company generates most of its revenue from advertising (as opposed to from users). The platform allows neighborhood residents to create private groups where they can post updates, events, and classifieds, and connect with neighbors. It also offers a directory of local businesses and services, allowing residents to find trusted recommendations from their neighbors. Additionally, Nextdoor has features such as crime and safety updates, lost and found pets, and emergency preparedness resources, which make it a valuable tool for residents to stay informed and connected with their community.

In the aftermath of natural disasters like hurricanes, wildfires, and earthquakes, for example, Nextdoor was used by residents to connect and support each other. During the COVID-19 pandemic, the platform has been used to organize food drives, mask donations, and other mutual aid efforts.

Social Networking

Businesses must meet their customers where they are, which over the past decade has come to mean on social networks. In 2020, users spent over 2.5 hours a day on social networks, a figure that has increased every year since measurement began. As a result, businesses continue to shift their advertising and marketing dollars online.

Competitors offering localized social networking include Meta (NASDAQ:META), Alphabet (NASDAQ:GOOGL) because of its Maps app, and Yelp (NYSE:YELP).

Sales Growth

Nextdoor's revenue growth over the last three years has been strong, averaging 21.3% annually. This quarter, Nextdoor beat analysts' estimates but reported mediocre 6.8% year-on-year revenue growth.

Nextdoor Total Revenue

Guidance for the next quarter indicates Nextdoor is expecting revenue to grow 2% year on year to $58 million, slowing from the 4.3% year-on-year increase it recorded in the comparable quarter last year. Ahead of the earnings results, analysts were projecting sales to grow 7.4% over the next 12 months.

Usage Growth

As a social network, Nextdoor generates revenue growth by increasing its user base and charging advertisers more for the ads each user is shown.

Over the last two years, Nextdoor's monthly active users, a key performance metric for the company, grew 8.6% annually to 43.4 million. This is decent growth for a consumer internet company.

Nextdoor Weekly Active Users

In Q1, Nextdoor added 1 million monthly active users, translating into 2.4% year-on-year growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Nextdoor because it measures how much the company earns from the ads shown to its users. ARPU can also be a proxy for how valuable advertisers find Nextdoor's audience and its ad-targeting capabilities.

Nextdoor ARPU

Nextdoor's ARPU has declined over the last two years, averaging 7.3%. Although the company's users have continued to grow, it's lost its pricing power and will have to make improvements soon. This quarter, ARPU grew 3.9% year on year to $1.22 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor.

Nextdoor's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 81.2% this quarter, up 1.1 percentage points year on year.

For social network businesses like Nextdoor, these aforementioned costs typically include customer service, data center, and other infrastructure expenses. After paying for these expenses, Nextdoor had $0.81 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.

Nextdoor Gross Margin (GAAP)

Nextdoor's gross margins have been relatively stable over the last year, averaging 81.2%. Its margins are some of the highest in the consumer internet sector, enabling it to fund large investments in product and marketing during periods of rapid growth to stay one step ahead of the competition.

User Acquisition Efficiency

Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Nextdoor grow from a combination of product virality, paid advertisement, and incentives.

It's very expensive for Nextdoor to acquire new users as the company has spent 66.9% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates a highly competitive environment with little differentiation between Nextdoor and its peers.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

Nextdoor's EBITDA was negative $14.02 million this quarter, translating into a negative 26.4% margin. It pains us to say this company is one of the worst performing consumer internet businesses from a profitability standpoint, averaging negative 30% EBITDA margins over the last four quarters.

Nextdoor Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Nextdoor burned through $13.65 million in Q1, reducing the cash burn by 0.9% year on year.

Nextdoor Free Cash Flow

Nextdoor has burned through $59.41 million of cash over the last 12 months, resulting in an uninspiring negative 26.8% free cash flow margin. This low FCF margin stems from Nextdoor's capital-intensive business model and desire to stay competitive.

Key Takeaways from Nextdoor's Q1 Results

It was good to see Nextdoor's strong revenue guidance for next quarter, which topped analysts' expectations. Adjusted EBITDA guidance for next quarter was also ahead. With regards to the reported quarter itself, we were also excited its revenue and adjusted EBITDA outperformed Wall Street's estimates. On the other hand, its revenue growth regrettably slowed. Zooming out, we think this was still a strong quarter. The stock is up 8.2% after reporting and currently trades at $2.44 per share.

Is Now The Time?

When considering an investment in Nextdoor, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for everyone who's making the lives of others easier through technology, but in the case of Nextdoor, we'll be cheering from the sidelines. Although its revenue growth has been solid over the last three years, Wall Street expects growth to deteriorate from here. And while its impressive gross margins are a wonderful starting point for the overall profitability of the business, the downside is its ARPU has declined over the last two years. On top of that, its growth is coming at the cost of significant cash burn.

There's no doubt that the market is optimistic about Nextdoor's growth prospects, as its price/gross profit ratio based on the next 12 months of 6.0x would suggest. While we've no doubt one can find things to like about Nextdoor, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $2.64 per share right before these results (compared to the current share price of $2.44).

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