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Is USER Stock Trading at a Discount? Key Insights for Investors

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Chapter 1: Introduction to UserTesting Inc.

Greetings, investors!

In today's analysis, we will delve into UserTesting Inc. (USER). User testing, or usability testing, refers to the method of assessing how customers interact with a specific product, service, or brand. This process allows businesses to gather valuable insights from user experiences, enabling them to enhance their offerings.

Founded in 2007, UserTesting made its public debut in November 2021. While USER stock saw a decline post-IPO, it has started to regain traction in 2022, showing a 17.6% increase this year. Are investors missing out on this opportunity? If you're new here, consider subscribing for complimentary stock analysis.

Now, let’s dive deeper into the Stock Report: UserTesting Inc. (USER).

"What if you could experience your products through the eyes of your customers?" — UserTesting Prospectus

UserTesting, true to its name, provides a platform that delivers real-time, authentic customer feedback. Businesses can observe and listen to their clients as they interact with various offerings including products, services, apps, and brands. Essentially, UserTesting aims to transform the traditionally labor-intensive process of gathering qualitative feedback (like focus groups).

CEO Andy MacMillan emphasized the company's value proposition in the USER prospectus:

"As a product executive at major companies like Oracle and Salesforce, I would have greatly benefited from acquiring such in-depth insights from both existing and potential customers during the design iterations. We often struggled to connect with customers for feedback when needed, or we ended up spending tens of thousands on agencies to gather this information on our behalf."

The significance of this platform is clear. Here are a few practical applications:

  • Product teams can explore new markets and assess customer requirements.
  • Marketing teams can swiftly gauge reactions to brand messaging, product names, and campaigns.
  • R&D teams can study user behaviors to identify usability strengths and weaknesses.
  • Customer service teams can enhance each touchpoint in the customer journey.
  • Companies can benchmark their user experiences against competitors.

How Does UserTesting Operate?

Participants sign up to engage in various consumer tests, like surveys about brands or new products. The UserTesting platform captures video recordings of users as they perform designated tasks, providing insights into their intonation, facial expressions, body language, and narration.

Each assessment yields a Customer Experience Narrative (CxN), which businesses receive within a day. Additionally, the platform employs machine learning to highlight "key moments," offering immediate insights to organizations.

How Does UserTesting Recruit Participants?

UserTesting's contributor network is a major asset, boasting over 600,000 participants as of November, contributing to 1.4 million CxNs in 2020. The primary incentive for testers is monetary compensation, ranging from $4 to $120 depending on the test length. For instance, a 5-minute survey pays $4, while a 20-minute recording nets $10. However, as noted by Andy MacMillan during the company's first earnings call, higher-earning contributors often prioritize being heard over financial rewards, ensuring their opinions are valued by businesses.

Comparative Pricing of UserTesting’s Services

UserTesting primarily targets large corporations, with enterprise subscriptions typically starting around $18,000 to $20,000 per year. This platform is not aimed at small businesses or startups. Nevertheless, alternatives like Maze and Lookback exist at more accessible price points. Yet, UserTesting arguably offers superior video features compared to its rivals.

According to G2 ratings, UserTesting leads in categories such as:

  • User Research
  • Software Testing
  • Consumer Video Feedback

From a public company perspective, competitors include Qualtrics (XM), Amplitude (AMPL), and Momentive Global (MNTV), although there is less product overlap with private competitors. Notably, UserTesting established a partnership with Qualtrics in 2019.

Assessing UserTesting’s Profitability

UserTesting has seen steady revenue growth, a reflection of its subscription model and strong client retention and acquisition. The company currently serves 2,350 customers, a 37% increase from the previous year, including over half of the world’s top 100 most valuable brands, as reported by Forbes.

In the fourth quarter, UserTesting expanded its relationships with notable clients such as AMC Entertainment, Anheuser-Busch, and Lowe’s. The anticipated full-year revenue for 2022 is around $196.5 million, indicating a 33% year-on-year growth rate. The gross profit margin remains robust at just under 75% for FY21, meaning UserTesting retains approximately $0.75 for every dollar earned after deducting contributor payments. However, increased marketing expenses have led to a net loss, which grew from approximately $34 million in FY20 to about $50 million the following year.

This trend is understandable as USER is a growth-focused company seeking to expand both domestically and internationally, with international revenue rising by 76% in FY21.

UserTesting’s Stock Outlook

The consumer research sector is highly competitive, and UserTesting's offerings face potential alternatives, leading to a relatively low barrier for entry. The future will reveal whether UserTesting can effectively implement its growth strategy while managing expenses and achieving profitability. Currently, the company is cash flow negative, but its recent IPO has enhanced liquidity.

The broader technology sector's sell-off, driven by inflation concerns and rising interest rates, has made USER stock more appealing. As of Thursday, shares closed at $10.09, significantly lower than the IPO price of $14 per share. Wall Street's average price target for USER stands at $13.90.

This analysis was initially shared through the Due Diligence newsletter. Interested in receiving these insights directly? Sign up here.

Chapter 2: Understanding UserTesting's Value Proposition

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Chapter 3: Analyzing Stock Value

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