Down 65%, This Small-Cap Stock Could Be a Home Run for Patient Investors

Nextdoor (KIND -1.86%), the neighborhood-focused social media platform that went public via SPAC last year, is a rather unique company. With a market cap of just $2.4 billion, it is by far the least valuable of the major social networks -- for reference, this is about one-seventh of Pinterest's (PINS -0.52%) valuation, 7% of what Twitter (TWTR) is worth, and just 0.4% of the market cap of Facebook parent Meta Platforms (META -0.52%).

Despite its low valuation, Nextdoor has achieved some serious traction. There are nearly 70 million verified Nextdoor users, and one of every three U.S. households has a Nextdoor user. And while investors seemed very excited about Nextdoor going public at first, the stock has cooled off along with most other former SPACs, as Nextdoor is down by nearly two-thirds from its highs.

One of the most recognizable brands in the United States

Nextdoor was recently named one of Time magazine's 100 most influential companies for the second year in a row. And in their category (Leaders), they are in good company -- others include Airbnb (ABNB 1.17%), Spotify (SPOT -7.28%), and Walgreens (WBA -1.33%), just to name a few.

Image source: Getty Images.

Nextdoor's goal is to bring neighbors together on social media, and to build a kinder world (where the company's ticker symbol comes from). There's tremendous opportunity here -- people want to know what is going on in their community, what new businesses are opening, and what there is to do in their local area.

Plus, Nextdoor's user base tends not to be as active on other social media platforms. For example, two-thirds of Nextdoor users are not on Twitter, so it is a great place for advertisers to find an audience they can't target elsewhere.

Monetization remains a big question mark

Of Nextdoor's 69 million verified users, 36 million are active on the platform on at least a weekly basis, and virtually all of them live in the United States. This is a big accomplishment, but in order to achieve profitability and take the business (and the stock) to the next level, Nextdoor is going to have to figure out how to monetize its users.

To be sure, it isn't necessarily doing a bad job of this, as it generated $1.65 in revenue from its average user in the fourth quarter of 2021, up 12% year-over-year. But this doesn't even compare with how its competitors are doing:

Data source: Company financials.

This is by far the biggest reason why Nextdoor's market cap is so much lower than its rivals. It isn't the user base -- in fact, the platform's active U.S. user base is very close to Twitter's. But frankly, Twitter has done a far better job of making money from its user base.

There's certainly potential, and it's important to take the 12% year-over-year revenue growth rate with a big grain of salt. Nextdoor just recently went public, and as a result, heads into 2022 with a war chest of capital (over $715 million in cash and securities) that it simply didn't have at this point last year.

The user base is in place and so is great management

Nextdoor has done the hard work to build up a large base of users, and if it can figure out the monetization question, it could end up being a home run for investors who get in now. This isn't a low-risk investment in any sense of the word, and is still losing money, but Nextdoor has a ton of capital to pursue growth and engagement opportunities, not to mention an excellent CEO in Sarah Friar, who formerly held the CFO role at Square (now Block (SQ -1.57%)) and was instrumental in that company's monetization of its popular Cash App.

I'm confident that Nextdoor will figure it out. I've added shares to my own portfolio, and while I'm not expecting a smooth ride, I'm excited to watch the next chapters in the company's evolution unfold in the years ahead.