GoDaddy Revenue Growth Likely to Decline in 2023 (GDDY)

GoDaddy at a glance

GoDaddy (New York Stock Exchange: GDDY) announced its financial results for the first quarter of 2023 on May 4, 2023, below consensus estimates for revenue and EPS.

The company provides a range of web hosting and related services around the world.

I was previously Written on GoDaddy with commentary Classification here.

While the payments business in the US is a bright spot with significant growth potential, overall revenue growth remains lower than in past years.

Until management can reignite double-digit revenue growth, as you say, I’m still holding on for GDDY.

GoDaddy Overview

GoDaddy was founded in Tempe, Arizona in 2014 to provide a suite of website hosting services to organizations around the world.

The company is headed by CEO Aman Bhutani, who was former president of Brand Expedia Group and chief technology officer at JPMorgan Chase.

The company’s core offerings Includes:

• hosting site.

• SSL certificates.

• Website creation software.

• digital marketing.

• business applications.

• payments.

• search engine optimization.

GDDY serves individuals, businesses, developers, and domain investors.

GoDaddy’s Market and the Competition

According to the 2020 Market Research Report by Grand View Research, the global web hosting services market was estimated at $56.7 billion in 2019 and is expected to reach $180 billion by 2027.

This represents a strong projected compound annual growth rate of 15.5% from 2020 to 2027.

The main drivers of this projected growth are the increasing number of individuals and businesses seeking a web presence and the growing desire to perform more business functions in the cloud.

Also, the advent of the COVID-19 pandemic has led to a strong growth in internet-based activity, providing a boost to the industry.

Major competitors or other industry participants include:

• to me.

• Wix.

• Weebly.

• Shopify.

• BigCommerce.

• Square Space.

• mailchimp.

• Mind/body.

• others.

Recent financial trends for GoDaddy

• Total revenue increased by quarter according to the following chart:

• Gross margin by quarter remained stable:

• Selling and general account expenses as a percentage of total revenue decreased by quarter in recent quarters:

• Operating income by quarter has been flat recently:

• Operating leverage has increased by a quarter significantly in recent quarters:

• Earnings per share (diluted) fluctuated as per the chart below:

(All data in the above graphs are GAAP)

In the past 12 months, the share price of GDDY has increased by 4.45% against the growth of Wix.com Ltd. (WIX) by 26.38%, as the chart below indicates:

On the balance sheet, the company ended the quarter with $1.05 billion in cash, cash equivalents and securities trading assets and $3.83 billion in total debt, of which only $18.3 million was classified as the current portion due within 12 months.

Over the subsequent 12 months, free cash flow was $928.9 million, of which capital expenditures accounted for $70.2 million. The company has paid out a whopping $277.1 million in stock-based compensation in the past four quarters, the highest twelve-month total over the past eleven quarters.

Rating and other GoDaddy metrics

Below is a table of the relevant capitalization and valuation figures for the company:

Measures [TTM]	amount
Enterprise value/sales	3.4
Enterprise Value / EBITDA	19.6
Price / sales	2.8
Revenue growth rate	5.3%
net income margin	8.0%
EBITDA%	17.4%
Market value	$11,210,000,000
project value	$14,100,000,000
operating cash flow	$999,100,000
Earnings per share (fully diluted)	$2.09

Click to enlarge

(Source – Finding Alpha)

For reference, Wix.com (WIX) would be a partial public item comparable; Shown below is a comparison of their primary rating scales:

measurement [TTM]	Wix.com	GoDaddy	variance
Enterprise value/sales	3.0	3.4	12.9%
Enterprise Value / EBITDA	NM	19.6	-%
Revenue growth rate	8.4%	5.3%	-36.8%
net income margin	-14.6%	8.0%	-%
operating cash flow	$96,780,000	$999,100,000	932.3%

Click to enlarge

(Source – Finding Alpha)

The Rule 40 is a rule of thumb in the software industry that states that as long as the combined revenue growth rate and EBITDA rate equal or exceed 40%, the company is on an acceptable EBITDA/growth path.

GDDY’s most recent base of 40 account was 22.7% as of Q1 2023 results, so the company needs some improvement in that regard, per the table below:

Rule of 40 performance	Calculation
recent growth rate %	5.3%
EBITDA%	17.4%
the total	22.7%

Click to enlarge

(Source – Finding Alpha)

Comment on GoDaddy

In its latest earnings call (Source – Finding Alpha), which covers first-quarter 2023 results, management highlighted growing optimism by the company’s customer base.

The company has surpassed the annual run rate of $1 billion in total payments volume for US payment platform services.

However, the company’s aftermarket resale and large transaction segments have become unpredictable and subject to constant fluctuations.

The company has also experienced persistent foreign exchange headwinds in its international business due to the strength of the US dollar.

GoDaddy’s customer retention rate was 85% in the first quarter, indicating modest sales and marketing efficiency.

Total revenue for the first quarter of 2023 increased 3.3% year-over-year and gross margin decreased 0.3 percentage points.

Selling, general affairs and administrative expenses as a percentage of revenue decreased 2.7 percentage points year-over-year and operating income grew 1.6%.

Looking ahead, for the full year 2023, management has guided 5% revenue growth in the mid-range, emphasizing that they see a return to double-digit growth sometime in the future while not sacrificing profitability.

The company’s financial position is moderate, with large liquidity but relatively high long-term debt; Free cash flow has been very impressive over the past 12 months at nearly $930 million.

In terms of valuation, compared to WIX, the EV/Sales multiples of the two companies have converged in recent months with WIX multiple improving compared to GDDY, as the chart here shows:

The primary risk to the company’s outlook is a slowdown in the global economy, driven by a rising cost of capital and growing concern about credit availability, at least among US clients.

From management’s most recent earnings call, I put together a chart showing the recurrence of key terms mentioned (or not) on the call, as shown below:

I’m more interested in repeating potentially negative terms, so management cited “stagnation” once, “challenge”[es][ing]once, and “macro” four times.

Negative terms refer to challenging macro conditions that have negatively affected larger deal flow as companies delay purchases until the economic outlook improves.

A potential upside catalyst for the stock could include a decrease in the cost of capital, which reduces downside pressure on the equity multiple.

However, after the annual revenue growth of 7.2% for 2022, the management reduced the growth rate for 2023 to 5%, which is a significant drop.

While the payments business in the US is a bright spot with significant growth potential, total revenue growth remains lower than in past years.

Until management can reignite double-digit revenue growth, as you say, I’m still holding on for GDDY.