Many companies that went public over the past year have taken beatings in the recent stock market downturn, and neighborhood-focused social media platform Nextdoor (KIND -5.21%) is certainly no exception.
However, management just sent a clear message to investors that they see its stock as cheap at the current price by authorizing a relatively large share buyback plan. Here's what potential investors need to know.
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How big is Nextdoor's stock buyback authorization?
Nextdoor's board has approved a share repurchase program that allows management to spend up to $100 million buying back stock between now and June 2024. The company's entire market cap is just over $1.2 billion, so at the current stock price, that would amount to about 9% of the outstanding shares.
"We believe that the current macroeconomic environment, combined with the strength of our balance sheet, presents an attractive buying opportunity for our stock," said Chief Financial Officer Mike Doyle in the press release announcing the authorization. In other words, management thinks the stock is cheap right now.
If you aren't familiar, Nextdoor went public last year through a SPAC merger that valued it at $4.3 billion. Like most SPACs, its initial share price (and the price institutional investors paid) was $10. CEO Sarah Friar herself participated in the SPAC funding round at this valuation, as did T. Rowe Price, ARK Invest, and Khosla Ventures, the SPAC's sponsor. With shares down by about 70% from this level, and a staggering 84% off the high they reached shortly after the SPAC merger, it shouldn't be too much of a surprise that management thinks the social media stock is undervalued.
Growing fast, but that growth isn't coming cheap
The business is growing nicely, and it's generally doing what management said it would. At the time the SPAC merger was announced, Nextdoor was projecting $178 million in revenue for 2021. It ended up producing $192 million. It projected 40% revenue growth in 2022, and its first-quarter revenue grew by 48% year over year. The platform has 36.7 million weekly active users, and the average revenue per user grew by 12% year over year in the first quarter.
While Nextdoor has achieved its growth objectives so far in its short time as a public company, its growth hasn't come cheap. To be fair, Nextdoor made it perfectly clear to investors that the company wouldn't be profitable for some time -- in fact, the original investor presentation called for net losses of $103 million in both 2021 and 2022 as the operation ramped up. And 2021's net loss came out to $94 million -- a bit better than expected. However, Nextdoor reported a net loss of $33 million in the first quarter, so unless it can get expenses under control swiftly, this year's losses could be steeper than investors had anticipated.
Is Nextdoor stock cheap right now?
Another important thing to mention is that Nextdoor can certainly afford to spend $100 million on buybacks. It ended the first quarter with $712 million in cash and equivalents on its balance sheet, so even if we anticipate net losses of more than $100 million annually for the next couple of years, the company will still have plenty of financial breathing room after completing its buybacks.
And speaking of the company's balance sheet, keep in mind that Nextdoor's market cap is just over $1.2 billion. Back out its cash, and the market is really giving a valuation of just $500 million to the business itself. If the company can figure out how to keep its growth momentum going and create a path to profitability, the stock could indeed end up being a steal at the current level.
