GoDaddy Is Going Higher

GoDaddy Inc. (Nasdaq: GDDY) has long been penalized by the market, concerned over apps ecosystem eating away the website ecosystem, especially for e-commerce and other major categories. On the contrary, the company has successfully hopped on to a growth trajectory, with help from the explosive growth in e-commerce and strong execution on the part of the management.

The stock was part of our weekly list of favorite Long and Short candidates. Mostly because as we updated our numbers from the recent quarterly results of the company as well as other major tech peers, it is apparent that the company is moving faster than earlier expected towards its ‘4-1-1’ goal for 2022, i.e. $4 billion in revenue and $1.1 billion in unlevered free cash flow.

While the broader economy is holding back, GoDaddy’s go-getter CEO is playing offense, making good of a resurgent industry that is experiencing a secular shift towards online commerce, gaining share, expanding its product offerings, and acquiring strategically important businesses that can deliver more than just vertical expansion.  

Favorable changes in the industry dynamics

The market continues to ignore GoDaddy as little more than domain registry and shrug it off as a business lacking long-term growth, a big reason why the market hasn’t rewarded GoDaddy with richer trading multiple.

That viewpoint is myopic and wrong. The recent fight between Epic Games (publisher of Fortnite) and Apple (Nasdaq: AAPL), Facebook (Nasdaq: FB) boycott by advertisers has highlighted how corporates are waking up to problems about getting locked in an ecosystem, including an app, which is leading to a resurgence in owning websites where they can control their message and branding. Indeed, Purnha is also an attempt to do the same.  

As covered in detail in our previous notes on Google (Nasdaq: GOOG) and Sprout Social (Nasdaq: SPT), consistent growth in online commerce and availability of platforms like Shopify (Nasdaq: SHOP) and BigCommerce (Nasdaq: BIGC) has led to an increasing number of merchants building in-house online sales rather than just relying on third-party platforms like Amazon (Nasdaq: AMZN)

Company is monetizing it well

The success of GoDaddy’s value-addition efforts is visible in the strong growth of its Websites + Marketing business that saw ARR growth of 60% during the second quarter.  The company’s commerce tier, which allows a user to build their e-commerce websites with ready tools for $25 per month, grew 90% over last year, highlighting the demand from new entrepreneurs.

Godaddy long-term goals for stock appreciation
GoDaddy’s long-term strategic vision. Purnha’s source: GoDaddy Presentation

As the chart above shows, the company is moving towards growing its total available market by providing more value-added services carrying higher customer spend. So the key is to continue to grow the customer base and sell more lucrative service offering to this growing customer base.

And the company is moving faster on this goal, adding 400,000 customers during the previous quarter, an increase of 200% over last year, bringing the company’s total paying customers count to 20 million.  

What comes next is even more promising

In an environment when most companies refused to provide any type of forecast, the company has stuck with the guidance, and an impressive one indeed, revenue growth of 10% and unlevered free cash flow of $825 million for the year. But the guidance may be proven conservative if we look at some of the product expansion efforts.

By adding new features and functionalities, including more marketing tools, video streaming, security options, and bulk purchase experiences, growing ease of use of the products is introducing the products to ever-bigger markets.

At the same time, free offers are widening the front door, inviting more customers to give it a try. The company has been adding more services offerings as part of this ‘freemium’ offering, which is proving quite successful in a growing market.

Acquisitions starting to contribute

The company has made three acquisitions this year – Over, Neustar’s registry business and Uniregistry, and contributions, both financial and strategic, should be evident to the investors over the coming months.

Uniregistry has already been clubbed to form the GoDaddy Corporate Domains teams. Full functionality of Over is also embedded in the website + marketing offerings and early results are visible, with the pace of user growth doubling sequentially to 1.7 million users engaging on the platform.

Acquisition of Neustar’s registry business is already closed and even though the financial contribution from the business is expected to be small this year, contribution to vertical integration with the existing domain business and new product development from the business should be apparent to investors over the coming months.  

Margins and cash flows, unappreciated combo

GoDaddy Inc. 
 CAGR 2015-19
Revenue17%
Gross Profit17%
Technology and development14%
Marketing and advertising14%
Customer care12%
General and Admin11%
Adjusted EBITDA35%

As the chart above shows, the company has been able to deliver pretty meaningful improvement to the margins over the last five years, highlighting the existing leverage in the business model.

With customer acquisition costs coming down, company restructuring its U.S. outbound sales team, and synergies from the recent acquisitions coming through, margin and cash flow numbers should get a boost.

DISCLOSURE: Before writing a note, we usually ask (via Twitter and Stocktwits) for things readers would like us to cover in the note, please do share your views for our next note. This is purely an academic exercise for our internal use and we are NOT recommending buying or selling based on these projections.  

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