A Look at Nextdoor

Can Nextdoor Holdings's (KIND -1.86%)new and experienced management team turn around this business given its history of bad publicity? Join Motley Fool analysts Asit Sharma and Emily Flippen as they discuss if Nextdoor's product is really better than you may think.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Nov. 16, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Tuesday, November 16th. I'm Consumer Goods host Emily Flippen. Today, I am joined by Motley Fool senior analyst Asit Sharma. We're going to talk about what is apparently a very controversial company going public by way of a SPAC. It is Nextdoor. Asit, thank you for joining.

Sharma: Emily, thanks for having me. This is usually the part of the podcast where I comment with a lame pun. But I confess I really couldn't come up with the good one, so I will have to revert to pop culture and quote the great Mr. Rogers and say it's a beautiful day in the neighborhood.

Flippen: [laughs] That is great. Honestly, when I think about the name here for Nextdoor, I think they've really hit the nail on the head. It's a name that I think a lot of our viewers, especially if you're a homeowner, you're probably familiar with it. I have to say in our very preliminary research, which was generally just talking with our analysts team about this company, I found that there were very divisive opinions on both sides of the fence here. Some people loved it and other people really hated it. When I reached out to you Asit to jump in on this podcast, we both agreed, let's not tell each other which side of that fence we fall on. We have our notes, we have some facts about the business, but we've kept our opinions to ourselves up to this point. I'm really excited to hear I guess how you feel about Nextdoor.

Sharma: Can't wait to divulge. [laughs]

Flippen: Well, to kick it off, Nextdoor describes itself as a hyperlocal app that aims to connect residents more closely to their neighborhoods. I have to say as an apartment I live myself, I'm not a user of Nextdoor connecting with my neighborhood, honestly sounds like something that I maybe wouldn't want to do. I tend to keep my head down when I walk through the hallway. [laughs] I don't know. I've never used this product myself, but is that an accurate description Asit?

Sharma: Yeah. Emily, I find it to be basically, I don't want to use the word glorified here because that sounds already like a pejorative, but it's like souped-up listserv. This technology has been around for a long time in various guises, so many people across the U.S. communicate with their neighbors online through formal and informal networks. This is an app that draws all that communication together. I think it is pretty functional. It is essentially to me, a topic-posting forum with threaded comments. That's its biggest utility. It's great for safety issues, for organizing volunteer efforts, which the company highlights in its offering materials, really nice for public service and public safety announcements within your neighborhood. What I think is cool is that it expands the concept of what a neighborhood is, so when you sign up, you put in your information, you find that you're surrounded by other neighborhoods. That's to the advantage of this app which is trying to monetize you. It's trying to get a big group of people together. I had this vision that I would sign up for Nextdoor, which I did, I think now a couple of years ago, and up and down my street, it would be like my neighbors. 

This is the essence of a community list serve. It's like the people that you know anyway, they're very good at broadening that concept out. You can start to see the various communities and subdivisions around you, what they're like, what their personalities [laughs] are, you interact with them, so I have to give them that. Company really wants you to use that app. They do have web functionality and email digest. Now, I have migrated to become that kind of user. But they are clunky. If you try to use us on the web, it is purpose-built I think to make you want to them install the app because harder to monetize you over the web versus that really snazzy app that rests on your phone. I love that it has some nice community-building aspects and the types of volunteer efforts helping people out, praising neighbors who do well. But in my experience, it can also be a pretty depressing place now, granted I'm not a huge user of social media. I am on Twitter, I am on LinkedIn, but not any other platforms. My wife and I joined to find out about an incident in our neighborhood about two years ago because we heard a lot of gunshots, and it's a very sleepy, quiet neighborhood, and we were curious. 

My wife said, "Well, on Nextdoor, some of my friends are on that and you can pretty much find out, people will say what's going on." I did that. What I found is that there are many interesting conversations going on, on the platform, but they tend to reflect our very polarized society. Even well-intentioned conversations can quickly get caustic.

Someone says, oh, I wish that we could change X and we all know that the do-gooder profile is someone who is really idealistic, conversational start that way, go downhill fairly quickly. It often seemed more like middle school to me, there's cyberbullying, there are thinly-veiled racist remark sometimes, and that balances out so many feel-good post that have to do with pets. Citing wild animals around your neighborhood. Praising those kind neighbors. They leave the moderation to community volunteers, which I understand, that it seems to be part of the model. It would be very expensive I think for the company to use the same type of moderation that maybe bigger platforms like Meta's, Facebook are able to employ with all their cash on their balance sheet. I will close this long description of product usage by saying that I have dialed back my usage, so just looking at that weekly digest email, I grew tired of it after thinking at the beginning it might be something useful. But let me end with something positive. I think it's great for people who are moving from one place to another. Emily, if you decide to move out of state and buy a home somewhere, maybe go back to Texas, but not where you grew up or just plunge into a new state, this is the thing where you might want to join up and say, hey, I'm Emily, glad to meet my neighbors, and you will see lots of response is coming. People welcoming you. You'll get to learn more about the community, so it does have that positive aspect about it. I try not to give a curmudgeon product review there. I'm afraid maybe I did come across as curmudgeonly.

Flippen: Let me continue this product review because this is the reason why Nextdoor is so controversial. I have to say when I heard that it was going public, my immediate response was a little curmudgeonly as well. While I'm not a user, I do have friends and family who use the product and I've heard that the great thing about Nextdoor is that you really do get to know the people in your neighborhood. The worst thing about Nextdoor is that you really do get to know the people in your neighborhood. For every great thing that there is about your neighbors, there's also this element of we're communicating digitally, not face-to-face, and people have different experiences, different opinions, different personalities, and Nextdoor by nature of its existence, gives people an opportunity to let them express themselves in whichever way they see fit. Nextdoor has been so controversial because it's led to a lot of really challenging social dynamics at the community level. I remember they had a feature for a while where people could directly communicate to the police anytime they saw something or are they had any concerns where they could press a button and it would call the police and let them know. They had to get rid of that, so people were making calls into the police that were based on going down the street, so it's that concern that I think has really changed the Nextdoor experience. Now that being said, every friend that I have that comes onto the platform, they also tend to revisit the platform again and again, so what I'm getting, talking to my friends and my family about these challenges that they are experiencing, they're still revisiting the platform day after day, and I think that stands for something.

Sharma: I think for me there was a period of doing that, but then I eventually just decided that there wasn't enough for me to want to go back. But having said that, we should probe this business model and I have a big-picture question to ask you, so services that we are talking about include a news feed where neighbors can post. You can join groups, you can get recommendations and business reviews, and that is part of the model. Can you describe to us basically anything more about the model and how it was founded?

Flippen: Yes, this is such an interesting company. Nextdoor was founded by a big group of friends. I think it was something like nearly half a dozen friends back in 2008. It was actually run by one of these co-founders until 2018, when the then CEO and one of the co-founders, Nirav Tolia, and I hope I'm pronouncing his name correctly, stepped aside. I love when we have a founder-led companies, I love when we have a really high level of engagement from co-founders. But at the same time, the new management team that they've brought in is actually, for lack of a better word, pretty stacked. The former CFO of Square, Sarah Friar, she came in to take over for Tolia after his departure, she brought with her a very large number of very highly experienced managers from other amazing businesses. This is actually maybe a management team that has its sights set out to change some of these concerns that we noted about the experience of Nextdoor and they've certainly been making moves over the past few years.

Sharma: Yes, I agree, Emily, and it is good to have a team that can execute that has produced some growth at scale before. That's always good in a business which is going or undergoing a transition period where now it's under the public microscope that this company has come public via SPAC, needs to keep trying to accelerate and generate profits. It's good to bring in a seasoned team and I also say it's probably good because Nirav Tolia just seems to have a habit of finding himself in the middle of one controversy after another. Not enough time in a short podcast to go into that you can look this up online, and I have no comments good or bad to say about that, except it's a distraction when a company's trying to achieve its strategic goals. That's probably a plus as well.

Flippen: We've talked about the experience to this point and I think that is important, but when I talk to analysts who are very excited about Nextdoor, everybody will point to some of the numbers. So the numbers themselves. I was actually impressed by Nextdoor has more than 60 million verified neighbors on it. Twenty-seven million of which access this app weekly, so a really high-level engagement, and that correlates to about 1 in 3 households in the U.S. being active on Nextdoor in some way or form. And I think that's pretty strong. I think your point Asit, if I were to ever make a move, I would certainly download Nextdoor and try to get an understanding for the neighbors of the area that I'm moving to, so it has value. How they monetize that is probably the biggest question.

Sharma: I think that the model they have set up is a good one, so they rely on Third-Party advertising, that is, businesses that want to sponsor community or to be more visible. They have some verticals that they target. Cable is a big advertiser [laughs] on Nextdoor. They have retail as well. They are presenting themselves as a platform that can draw eyeballs and that's persuasive to advertising audiences. I think with the way the world is moving toward programmatic advertising, the fact that they have some investment in AI in self-serve advertising, this could be persuasive in the model as time goes by. I mean, this is going to take some time to see how that trends out but let me throw this big picture question at you before we talk about the actual engagement. What do you think about a platform business, Emily, that in and out of itself doesn't have a monetizable avenue except for advertising, what are the pros and cons of that when you look at a business sort of sight unseen like this one?

Flippen: I'm actually not completely turned off a bit. I love that you asked that question because I can think of a couple examples of businesses that actually are either entirely ads or vastly majority ad-based businesses. One is actually Pinterest, and I know Pinterest has struggled recently, I'm still very much a fan of that business.

Sharma: Same.

Flippen: While there is questions of eCommerce Integration, the core advertising business has always been pretty strong because engagement levels for visitors to the site have always been pretty strong. I also think about Doximity which is not a consumer-facing business, at least not inherently, but it faces toward doctors and it gives pharmaceutical companies an opportunity to advertise toward doctors. I'm not against the concept. I will say it needs to be carefully executed, which is, the platform cannot within itself degrade the experience for the purpose of monetizing through ads. Doximity, for instance, has a very strict rule. I think it's no more than 1 in 12 posts that someone will see on their news feed will be ads and that's to ensure that people actually get value from the platform. I don't know what Nextdoor does in terms of, if they happen, internal limits but you can only increase monetization so far before you degrade the experience. They need to be careful that they don't overload the site with ads and drive people away.

Sharma: Level that. I like myself to see at least one potential path, doesn't have to be on the ground today for another avenue of monetization in our platform business. But if you've got the users and you can bring the engagement then I say, I can roll with the advertising only model. Speaking of engagement, you had something that caught your eye and I also had something on that which I wanted to discuss.

Flippen: One of the metrics they broke down for us was the monthly active users engagement over a period of three months, six months, 12 months, and two years and after, the number of users that essentially stayed engaged, and it trails off. But it trails from a number of 74% after three months to around 54% after two years, which I think is pretty strong, right? We're talking about the number of clicks they get on a monthly basis from those same users. More than 50% of those people are still visiting monthly after two years. I will say, though, I took these numbers with a little bit of a grain of salt because this data is actually from their 2020 cohorts and a two-year data is from their 2019 cohort. While the numbers look pretty decent, not outstanding, I will say, but pretty decent, I do also think that there is some need for engagement that was perhaps unusual over the course of the last year or so that may not be repeatable again in the future.

Sharma: Yeah, and that need probably was the pandemic. They have this other metric which is also interesting. It's called the weekly active user or WAU. We're used to a world of DAUs [laughs], daily active users. I mean to read this definition, we define a weekly active user, or WAU as "a Nextdoor user who opens our application, logs onto our website, or engages with an email with monetizable content at least once during a defined seven-day period." This is such an interesting metric, Emily, it's sort of unusual out in the wider world, but it makes sense here because you refer to something which is very powerful. That is, you've got friends and family members who will sort of go off the platform, but they keep coming back for more [laughs] why is that? It's because of that digest email once a week, I think that you get or maybe a notification if you've still, unlike me, you still have your app and you haven't turned your notifications off. There's something that this company is really good at, and that is, being able to give you five or six blot to bread of high interest to you. I don't know if they're personalizing this or it's just that they've, through all of their research and previous data, discerned that, "Hey, you know one crime in your neighborhood, digest. 

One feel-good, let's help the homeless line. " There's some combination of all these that makes you certainly want to dive back in. I did that again for like a year after I first had the app, even though it didn't have a lot of utility for me. I finally gotten to the point where the pain of going back and reading, like you and I have described this balance of good and not so fun comments is that Pinterest is just too high now. They have a high threshold, but I admire the way they can get you at least once a week to think about the app and potentially dive back in. So it's an important metric for them. WAUs really started to just snowball during the pandemic. Their total WAUs in 2020 were 27.6 million versus less than 20 million in 2019. Of course, I wonder if this is really great metric for engagement because by this, definition, me just checking an email once a week. I'm a weekly active user, but they're not going to [laughs] monetize me anytime soon. I also want to point out a couple of risks to the metric and the risk for investors to try to understand how they're monetizing in that, Apple made some changes to their iOS email client and also down the road, we've heard that Alphabet is going to make changes to Google's cookies and its current browser. These types of moves hurt both the company's ability to measure how users are interacting, but also to get important data that they can use to make that platform more effective. But this is not something that's a risk only to Nextdoor. Many companies are grappling with these changes among the big walled garden companies.

Flippen: I think it's interesting, the network effects that exists with Nextdoor as well. I'm not sure it quite shows up in their numbers yet, but I can see a situation in which it does, which is, as they increase the amount of penetration within their neighborhoods. As more neighbors come onto the platform, the percentage of engagement from other existing neighbors tends to increase. Essentially, as more neighbors join, there's an increase in engagement, which shows an aspect of pent-up community building that exist on the platform, which I think could potentially increase their monetization long-term. I will say the financials, as they exist right now, I'd probably describe as challenging. You mentioned that it's hard to monetize you. You're checking at digest email, even if there's some ads or some existence of local payment or engagement and that digest, it's really hard to actually make you, just as a casual reader, monetizable, and that shows up in their revenue per average daily user, which is only $10 over the course of the past year. They only have around 12 million daily active users, so that does trail off significantly from those people that are engaging less. It's less than a lot of the other social media businesses that we seem to be looking at. It's something to keep an eye on. Obviously, I still think a lot of people may assume with monetization that such a low rates is not a profitable business either. Something to keep in mind.

Sharma: Yeah. The engagements metrics are really attractive and they give me pause because it's hard to see this. Sometimes when you look at a business that's just come public via IPO or SPAC or direct listing, we have a tendency as human investors to visualize everything that's comp until this point and then extrapolate it with not a lot of accuracy, and sometimes platform, businesses take a few years to hit their stride. We've talked about pet platform businesses that I find it immensely interesting. I haven't really jumped in and invested in one yet, but I can see with that growing trend how it could in a few years. We looked at a couple, could be a very persuasive place to invest. This is something that I think one should pay attention to with Nextdoor that they've got, even at that, if you take 11 or 12 active, engaged users on a daily basis and figure out how to draw a little bit more out of them, that starts to make those unit economics look not so poor. This is something that I was pleasantly surprised to see [laughs] as I read through the company's offering materials.

Flippen: It's funny how we haven't even reached there.

Sharma: Yeah. You've included some summaries from their investor presentation here. I'm looking at them right now. Not profitable on a book basis and not even on an EBITDA basis, earnings before interest, taxes, depreciation, and amortization, not profitable on an adjusted EBITDA basis, where you can put your own take on what adjusted earnings should look like. Having said that, it does look like the company has a little bit of traction in the cards. Their net loss for 2021, estimated net loss is about the same for what they estimate out to fiscal 2022. That's $103 million net loss per GAAP. The model itself, while it's losing money, at least it looks like it might be stable in the next year or two, which begs the question, how then does this company generate more momentum on that top line to start looking like something where you're pulled to invest in it. I don't know if you had any other observations on those income statements.

Flippen: That's a great point. I will say, this is a business that I believe is trading or valued at something like $5 billion right now as we're taping. Pretty lofty valuation for a business that has done just over $120 million of total revenue and it's not projecting profitability at any point really over the near horizon. Long-term, they hope to get to adjusted EBITDA margins of around 40%, which is certainly not bad, but it's a little low, I think, for what I was expecting, which is, this is a platform business so it should be asset-light, not too capital-intensive, but long-term adjusted EBITDA margins of 40%. When I look at how they're projecting out, how they're going to grow that average revenue per user, I mentioned it was $10 per user for the people who are visiting daily, for the people who are just visiting actively. That's including yourself who just checks emails, Asit. That number is just under $5. Their projections have that growing pretty significantly in 2021 but been pulling back in 2022. I wish I had a more cohesive plan for how they're going to increase the monetization rate. They talk a little bit about things like sponsored posts, local ads, local deals from local stores, that sort of thing. It's very hyper-local, potentially getting people expanded into other neighborhoods, so expanding into neighborhoods where maybe your parents live or your friends live, where you want to buy a house. There's other ways they could do it. This being a SPAC business means that we don't have necessarily all of that great information that we want. For that reason, when I'm looking at $5 billion dollars with no sign of profitability even on an adjusted basis over the next couple of years, as well as maybe a challenging growth and average revenue per user, I find myself wanting to sit on the sidelines a bit.

Sharma: Yeah it's interesting. One of those pet platforms we've looked at, the Rover Group, I believe they were estimated to generate like $500-$600 million in annual revenue. That's a $2.5, $3 billion business, which I think has some really interesting opportunities for monetization. They have four or five avenues. That is something that I lean intuitively as an investor, versus something like this where I have to myself come up with a scenario for how they're going to monetize. I'd like management to tell me, we're losing money. [laughs] We've got lots of users though, they're engaged, and here's how we're going to monetize them. No ifs, ands, or buts over the future. I think you have your finger on something, Emily, that it was a little more amorphous in how the company is projecting that path. Now I'm going to take us Zen moment here, and Asit, the curmudgeonly product user is going to go away, and Asit, the objective analyst will be with you all within two seconds or more because I want Emily to go first. Tell me what you thought about this business. I think you gave it away in the last couple of minutes.

Flippen: I did. I will say, when I heard about this business, I was one of those analysts that was pretty negative right off the bat. It was not as bad as I expect it to be, but I think the valuation is what kills it for me. But after last night, I found out my car got broken into, and then I let my apartment complex know, and they told me, "Sorry about that, there's been a string of these things happening." I'm thinking to myself, man, if I had just downloaded the Nextdoor app, I would have been a smart cookie and kept my doors locked instead of being a lazy cookie and leaving them unlocked. [laughs] For that reason alone, I'm not sure if I'm buying the stock, but I'm probably going to be downloading the app.

Sharma: That's so funny. I have come the complete other way. In my experience, I think it is useful for that, and I started with just that when we heard those gunshots in our sleeping neighborhood. I still wanted to be able to score some points with listeners and say, hey, despite my ideas about this product, I think it's a great company to invest in. I can separate the two. But at the end of the day, I really wasn't able to separate my assessment of the product and its utility and the way they operated from my natural skepticism about the business model so I remain not a big fan of this company upfront. I'll probably check in with it a couple of quarters or so, but that's not to say the company can't succeed. So many other businesses have proven us wrong, Emily. [laughs] Let's at least give them that.

Flippen: As I said, whenever we agree, the stock ends up 50% up over the next two months. You heard it here first.

Sharma: Absolutely, go and buy you some stock. [laughs]

Flippen: Well, Asit, thank you as always for joining. It was such fun today.

Sharma: Same here. Thanks so much, Emily.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out to say hey, shoot us an email at [email protected], or tweet us @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Asit Sharma, I'm Emily Flippen. Thanks for listening and Fool on.