What happened

Nextdoor Holdings (KIND 4.64%) underperformed the market this week. Shares were down 11% through Thursday trading, according to data provided by S&P Global Market Intelligence. The S&P 500 was up 0.3% during that time.

The drop added to significant losses for owners of the community connection platform. Shares are down over 60% since early 2022.

The slump came as Wall Street digested the latest earnings update from Nextdoor's management team.

So what

Nextdoor revealed on Tuesday that revenue had declined to $53 million in the selling period that ended in late December compared to $59 million a year ago. This drop occurred despite a rising user base and was powered by continued weakness in the online advertising industry.

Nextdoor's operating losses expanded as well, rising to $36 million from $29 million a year earlier. Investors have become less forgiving in recent quarters toward businesses that are generating losses. Shares of such companies have been hit especially hard during sales growth struggles too. Nextdoor suffers from both of those weaknesses, so it is no surprise that the stock fell further in response to the Q4 update.

Now what

The advertising market became softer in the second half of 2022, which suggests further growth struggles ahead for Nextdoor over the next few months. Yet there's good news surrounding the business, too.

Nextdoor is growing its user base and boosting engagement. The company is signing on more small- to medium-size local businesses as advertisers too, which should help it diversify over time. Finally, cost cuts are likely to push the company closer to profitability in 2023.

Still, the stock should remain pressured until there are clear signs of sustainable sales and earnings growth on the horizon. Investors should brace for continued volatility ahead for Nextdoor, which may worsen if a recession develops in 2023.