GoDaddy: a cash flow machine, probably close to fair value (GDDY)

GoDaddy Inc. (GDDY) is the leader in domain registrations and web hosting with over 82 million sites under management and over 21 million customers. This is a segment that has gained momentum in recent years as more and more small businesses expand their online presence, driving demand for e-commerce tools that can integrate across various platforms. -forms. The company has just released its latest quarterly results highlighted by strong growth and firming finances. The story here has been a continued shift towards more high-margin commercial apps that enhance core domain offerings. There’s a lot to like about GoDaddy generating strong cash flow with overall strong fundamentals as it solidifies its position in the market.

GDDY Revenue Summary

Fourth-quarter 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 was up 16.7% year over year and also beat estimates. It was also a good report compared to difficult compositions in the fourth quarter of 2020, with growth even accelerating compared to previous quarters. For the full year, revenue increased 15% with 2021 EPS of $1.42, while operating profit increased this year by 40% compared to 2020.

By segment, the core domains group led growth with sales up 24% year-on-year, accounting for approximately 50% of total business. This is important because it represents the start of a “revenue flywheel” where new customers come on board and generate a long tail of recurring revenue. Annual recurring revenue (ARR) reached $410 million, up 19% year-over-year, providing visibility into continued momentum. GoDaddy can capitalize on these trends with cross-selling opportunities with add-on features.

One of the highlights was the rise in average revenue per user, which reached $182, up 9.7% year-on-year. This reflects more activity geared towards business users adding “business applications” like online payment tools, cybersecurity, and e-commerce solutions. This segment recorded revenue growth of 18%. GoDaddy notes that its “GoDaddy Pro” offering now has 1.5 million users who are using more enterprise-level features.

The trends have translated into free cash flow that has now reached $960 million year-over-year, compared to $825 million in 2020. The company ended the quarter with $1.3 billion in cash and cash equivalents cash versus $3.9 billion in total debt. Given $872 million in EBITDA over the past year, a net debt to EBITDA leverage ratio of 2.6x is stable in our view, acknowledging rising earnings and cash flow in the future.

Following the release of fourth quarter results, the company announced a new $3 billion share buyback program, of which $750 million is expected to be completed in the current first quarter. The total amount of buybacks represents about 23% of the company’s current $13 billion market capitalization as potential shareholder return.

In terms of guidance, management is targeting 2022 revenue in the range of approximately $4.15 billion, representing approximately 9% year-over-year growth at the midpoint. The company also expects free cash flow of $1.1 billion, about 15% higher than the 2021 result, with some margin boost.

GDDY Stock Price Prediction

Our takeaways are GoDaddy’s overall impressive operational and financial trends. The company benefits from the notoriety of its name and its credibility in space. Metrics such as an increase in total bookings as well as higher ARR have added a layer of quality to the business, supporting a positive long-term outlook.

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

The challenge for GoDaddy is that its core domain hosting and website building business is facing intense competition. Beyond several smaller independent players offering quick internet search, a theme in the market has been the rise of DIY template tools built into e-commerce platforms such as Shopify Inc (SHOP). Small businesses can even effectively use social media sites like “Facebook” as their homepage which begins to reduce 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 that 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 basis to pass revenue, 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/EBITDA multiple on a forward-looking basis of 16.4x versus 34.5x for SQSP and 42x for WIX. Although not included below, GDDY’s price to free cash flow ratio at 13x is also compelling.

While WIX and SQSP show revenue growth this year benefiting from a smaller base, we believe GDDY deserves a larger earnings premium given its momentum and leadership position. In our view, it is possible for the valuation gap to narrow as an upside catalyst for GDDY shares. The trend towards firmer margins and faster growth, especially in domain activity, opens the door to some expansion in valuation multiples.

Is GDDY a buy, sell or hold?

We value GDDY shares as a reserve with a price target for the year ahead of $90.00. This level represents a market capitalization of $15 billion, which translates to a price/free cash flow multiple of 15x to management’s free cash flow forecast for 2022, as well as an EV/EBITDA ratio forecast of 17.5x according to our estimate.

Although our price target implies an upside of around 12% from the current level of the stock price, this is simply not enough to warrant a strong buy rating in our view. We think the spike in the fourth quarter earnings report has likely already priced in much of the positive outlook, including the takeover announcement. A correction below $70 across the board can create a new buying opportunity. One conclusion we have from looking at GDDY is that its peers between WIX and Squarespace seem expensive, which deserves a separate discussion.

Hedging some of the risks, the web hosting and domain industry remains exposed to broader macroeconomic trends. Weaker-than-expected economic growth, coupled with slowing consumer spending, may limit demand for new websites and business application tools. It will be important for GoDaddy to maintain its high margin levels and achieve its goals in 2022.