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Here's the SPAC I'm Most Excited About

By Matthew Frankel, CFP® – Nov 1, 2021 at 6:21AM

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This company could be the next social media giant.

Hundreds of companies have announced their initial public offerings (IPOs) through mergers with special purpose acquisition companies (SPACs) in the past year or so. And there have been some that look very interesting as long-term investments. However, in this Fool Live video clip, recorded on Oct. 27, Fool.com contributor Matt Frankel explains why social network Nextdoor, which is set to go public via merger with Khosla Ventures Acquisition II (KVSB), is the pending SPAC merger he's most interested in right now. 

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Matt Frankel: The next one I want to talk about is probably the pre-deal SPAC merger that I'm most excited about in the market. This is Nextdoor, the social media platform. They are going public through a company called Khosla Ventures, ticker symbol is K-V-S-B. Nextdoor is, as I mentioned, a social media platform. It is very cheap for what you're getting in terms of potential. Right now, the stock trades at essentially right at its $10 net asset value from its SPAC merger, which values the business at $4.3 billion inclusive of the $700 million of cash they're going to get.

To put that in perspective, that makes them the cheapest social media company by a factor of 10. I think the next cheapest publicly traded social media stock is Pinterest (PINS -2.15%), and they're in the $30 billion range. Nextdoor is a neighborhood-focused social media platform. They are all about building communities and building neighborhoods and helping neighbors connect with one another. Which to be honest is kind of an underserved market by the traditional social media companies. My neighborhood has a Facebook (META -4.27%) page, but that's not why I go on Facebook. It's not to connect with my neighborhood. They wanted to create an all-in-one destination where you know you're going to see local content as soon as you get on the page.

Nextdoor, their user growth has been absolutely phenomenal. They are in one in three, one out of every three United States households has a registered user on Nextdoor -- 63 million verified users, 29 million weekly active users. To put that in perspective, Square's (SQ -2.46%) Cash App has 40 million active users, so this is a pretty big user base when it comes to a social platform. The problem so far has been monetization. That's what it's lacking. The average Nextdoor user generates $10 of annual revenue for the platform. That's roughly one-sixth of what the average Twitter (TWTR) user does, so a big monetization gap.

Nextdoor, over the past few years especially, has been really rolling out new ways to potentially monetize the platform. One of the newest is permitting ads that are targeted at local audiences. For example, if I have a dog-walking business and want to advertise to my neighbors, Nextdoor could be the best possible way to do that, so why not monetize that potential. Right now, people have to search through a Facebook group, they go to Facebook, then find the neighborhood group. It's just a more clunky process that Nextdoor can deliver.

One of the more interesting statistics I saw from their recent investor day slideshow -- which I'm not going to go through the whole thing, it's like 130 pages; they're known for long investor decks. So two things. They have a proven network effect. Can you see the Nextdoor thing all right? OK. I'm bad at screen sharing when I have five monitors in front of me to pick which one. What you're looking at here is, the left column is the percent of neighbors who will be active on Nextdoor's platform. The bottom line is how much of the neighborhood is on the platform. What this means is as soon as it hits, say, 25% of households on the platform, active users just shoot up. The more neighbors that are on the platform, the more network effect it generates, the more engagement you're seeing. That's really what they have to do: They need to get everybody in a neighborhood on a platform, and their active users will take care of themselves.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP® owns shares of Pinterest and Square. The Motley Fool owns shares of and recommends Facebook, Pinterest, Square, and Twitter. The Motley Fool has a disclosure policy.

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