GoDaddy: A Cash Flow Machine, Likely Near Fair Value (GDDY)

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Internet Domain Registrar GoDaddy Goes Public On New York Stock Exchange

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GoDaddy Inc. (GDDY) is the leader in domain registrations and web hosting with over 82 million sites under management across more than 21 million customers. This is a segment that has gained momentum in recent years with more small businesses expanding their online presence driving demand for e-commerce tools that can integrate across various platforms. The company just reported its latest quarterly result highlighted by strong growth and firming financials. The story here has been an ongoing shift into more high-margin business applications that enhance the core domains offerings. There’s a lot to like about GoDaddy which is generating significant cash flows with overall solid fundamentals as it consolidates its market position.

GDDY Summary

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GDDY Earnings Recap

Q4 GAAP EPS of $ 0.52 was 27% higher than the same period last year and beat expectations by $ 0.11. Revenue of $ 1.02 billion climbed 16.7% year-over-year and was also ahead of estimates. This was an otherwise good report against difficult comps in Q4 2020, with growth even accelerating from previous quarters. For the full year, revenue climbed by 15% with 2021 EPS of $ 1.42 while operating income this year climbed 40% over 2020.

GDDY earnings

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By segment, the core domains group led growth with sales up 24% y / y, representing about 50% of total business. This is important as it represents the start of a “revenue flywheel” where new customers onboard and drive a long tail of recurring revenue. Annual recurring revenue (ARR) has reached $ 410 million, up 19% y / y providing visibility for continued momentum. GoDaddy can leverage these trends with cross-selling opportunities with add-on features.

One of the strong points has been the higher average revenue per user which reached $ 182, up 9.7% y / y. This reflects a greater portion of the business geared toward professional users adding “business applications” like online payments tools, cybersecurity, and e-commerce solutions. This segment reported 18% revenue growth. GoDaddy notes that its “GoDaddy Pro” offering now has 1.5 million users that utilize more enterprise-level features.

The trends have translated into free cash flow which has now reached $ 960 million over the trailing twelve months, up from $ 825 million in 2020. The company ended the quarter with $ 1.3 billion in cash and cash equivalents against $ 3.9 billion in total debt. Considering $ 872 million in EBITDA over the past year, a net debt to EBITDA leverage ratio of 2.6x is stable in our opinion, recognizing upside to earnings and cash flow going forward.

GDDY metrics

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A development out of the Q4 earnings release was the company announcing a new $ 3 billion share repurchasing program, with $ 750 million expected to be conducted just during the current Q1. The total amount of buybacks represents about 23% of the company’s current $ 13 billion market cap as a potential shareholder yield.

In terms of guidance, management is targeting 2022 revenue in a range of around $ 4.15 billion representing about 9% y / y growth at the midpoint. The company also expects free cash flow at $ 1.1 billion, about 15% higher than the 2021 result with some upside in margins.

GDDY metrics

Company IR

GDDY Stock Price Forecast

Our takeaway is overall impressive operational and financial trends from GoDaddy. The company benefits from its name recognition and credibility within the space. The metrics like an increase in total bookings as well as higher ARR have added a layer of quality to the company, supporting a positive long-term outlook.

GDDY Chart

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If we have any hesitation here, one area of ​​uncertainty would be that into a “post-pandemic” economic recovery, some of the demand for new sites may have already been pulled forward. We mentioned e-commerce is an important growth driver for the company, and we sense that 2020 and 2021 were big for these segments which are now facing some headwinds amid current macro trends like record inflation and rising interest rates. Even the outlook for 2022 with a 9% upside in revenue represents a slowdown compared to 16% in 2021, and even 11% in 2020.

GDDY ecommerce

Company IR

The challenge for GoDaddy is that its core domains-hosting / website builder business faces intense competition. Beyond several smaller independent players that come up with a quick internet search, a theme in the market has been the rise of DIY template tools that are integrated into e-commerce platforms like Shopify Inc (SHOP). Small businesses can even use social media sites like “Facebook” effectively as a home page that begins to cut out the need for GoDaddy services, or at least limit some of the growth potential.

The good news is that GoDaddy is doing something right proving its business model and strategy are resilient. When we include a peer group of publicly-traded competitors like Wix.com (WIX) and Squarespace (SQSP), GoDaddy stands out as the “value pick”. On an EV to forward revenue basis, GDDY at 3.6x is at a discount compared to 4.3x for WIX, 5.2x in SQSP. The company simply generates a higher level of profitability also considering an EV to EBITDA multiple on a forward basis of 16.4x compared to 34.5x for SQSP and 42x from WIX. While not included below, GDDY’s price to free cash flow ratio at 13x is also compelling.

Chart
Data by YCharts

While WIX and SQSP are presenting top-line growth this year benefiting from a smaller base, we believe GDDY deserves a larger earnings premium considering its momentum and leadership position. In our view, there is room for the valuation spread to narrow as an upside catalyst for shares of GDDY. The trend of firming margins and accelerated growth particularly from the domains business opens the door for some valuation multiples expansion.

Is GDDY a Buy, Sell, or Hold?

We rate shares of GDDY as a hold with a price target for the year ahead of $ 90.00. This level represents a $ 15 billion market cap which translates into a 15x price to free cash flow multiple against management’s 2022 free cash flow guidance, and also a 17.5x EV to forward EBITDA ratio by our estimate.

While our price target implies around 12% upside from the current stock price level, it’s simply not enough to justify a strong buy rating in our opinion. We believe the spike from the Q4 earnings report has likely already incorporated much of the positive outlook including the buyback announcement. A correction under $ 70 down the line may set up a new buying opportunity. One conclusion we have from looking at GDDY is that its peers between WIX and Squarespace appear expensive which deserve a separate discussion.

Covering some of the risks, the business of web hosting and domains remains exposed to broader macro trends. Weaker than expected economic growth, coupled with a slowdown in consumer spending, can limit demand for new websites and business application tools. It will be important for GoDaddy to keep its margin levels elevated and hit its targets in 2022.



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