• GoDaddy Inc.’s valuation is unsustainable, trading at 6.5x EV/FY25 revenue and 30.5x FY25 P/E despite slowing revenue and earnings growth.
• Bookings growth is decelerating, a key forward indicator of future revenue slowdown, making GoDaddy vulnerable to valuation compression.
• The web hosting market is highly competitive, with GoDaddy losing market share to rivals like Wix, limiting its pricing power.
• GoDaddy’s AI features are unoriginal and unlikely to drive significant growth; GDDY investors should seek better opportunities elsewhere.

2024 is drawing to a close, and with the stock markets nervously retreating from all-time highs, there has never been a better time for investors to deploy careful stock-picking for 2025 as the best way to beat the major

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• GoDaddy’s stock surged 100% recently but is now overvalued and poised for a contraction; my valuation model projects an 8.3% enterprise value CAGR over five years, justifying a Hold rating.
• Competitive threats from Shopify and Wix have led to a 1.4% customer decline; Shopify’s superior e-commerce platform pressures GoDaddy’s margins, necessitating heavy investment to stay competitive.
• GoDaddy does not offer exceptional medium-term return prospects; readers may find better long-term CAGRs from Shopify.

GoDaddy (NYSE:GDDY) has recently delivered an exceptional price return of over 100% in a year, but this has led to somewhat of an overvaluation. Indeed, the company was undervalued prior to this, but now it is positioned for a potential near-term contraction.

Even without such a contraction, my valuation model indicates only a moderate enterprise value CAGR of 8.3% over the next five years. Therefore, my rating is a Hold. My outlook is further reinforced by the competitive threat from Shopify, which, I believe, will continue to pressure GoDaddy’s margins in the medium to long term.

Operations & Financials

GoDaddy is a leading provider of internet services for small businesses, with operations split between its stable Core Platform (domains, hosting, and security) and its high-growth Applications & Commerce segment (e-commerce, payments, and marketing tools). Applications & Commerce has become its growth engine, with 16% revenue growth in Q3 2024 and strong adoption of bundled solutions. Management prioritizes shareholder returns, reducing outstanding shares by 23% since 2022 through aggressive buybacks, supported by its robust free cash flow. However, the company is facing a slight decline in its customer base (-1.4% year-over-year in Q3 2024) amid competitive pressures from Wix (WIX) and Shopify (SHOP). The company had a remarkably strong quarter in net income generation, up 45% year-over-year, resulting in a net income margin of 17%—this has undoubtedly supported the stock’s valuation expansion recently.

GoDaddy has raised its revenue expectations to a range of $4.545 billion to $4.565 billion for the full year 2024, indicating a 7% growth at the midpoint compared to the previous year. For the fourth quarter, it expects revenue between $1.165 billion and $1.185 billion (also a 7% year-over-year growth at the midpoint), with Applications & Commerce revenue growth expected in the mid-teens and Core revenue growth in the low single digits. This shows a moderately robust near-term outlook, but it still reveals pressure on the company’s Core segment, which is problematic for the long-term thesis amid competitive threats.

The company is focusing on higher-margin products such as productivity apps and website subscriptions—a strategic shift aiming to improve gross margins and reduce reliance on less profitable core domain services. The global rollout of its AI-powered GoDaddy Airo experience is expected to enhance user engagement and improve monetization gateways. Additionally, the company is now offering AI-powered digital marketing tools to integrate SEO, social media, and email marketing into a unified platform. However, the core domain services remain less profitable, which could potentially pressure its overall margins if not offset by the growth of its higher-margin products.

Moreover, management has decided to focus more on emerging markets where there is a growing demand for online services. India is a critical market for GoDaddy, being the first international market where the company established an office. It remains one of the largest markets for GoDaddy International. Beyond India, GoDaddy is expanding its reach to over 150 markets worldwide, including Africa, Asia, Latin America, and North America. Emerging markets account for approximately 50% of its new international customers, contributing around $400 million in revenue. This shows a robust long-term strategy and expansive market for management to capture and consolidate, and I think GoDaddy is quite well-positioned in this regard for sustainable growth.

GoDaddy competes with several well-established companies such as Namecheap, Bluehost (owned by Newfold Digital), Google (GOOGL) (GOOG) domains, and others. Newer platforms like Nexcess and A2 Hosting provide specialized services that can appeal to specific customer segments, such as those needing high-performance hosting for WordPress or e-commerce sites. On that note, Shopify provides probably the largest risk to GoDaddy expanding successfully through long-term e-commerce growth—I will analyze this more in my risks section below.

Valuation

Click to enlarge

Guidelines for inputs:

• GoDaddy’s weighted average cost of capital is 10.2%, with an equity weight of 87.59% and a debt weight of 12.41%. Equity costs 11.06%, while debt costs 4.17% after tax.

My valuation model, which takes into account my own estimates, shows a moderate overvaluation of 8.5% and indicates that the stock is prone to near-term contraction. Even disregarding this potential contraction, the five-year enterprise value CAGR will likely be just 8.3%.

Board

GoDaddy has a robust board, including Aman Bhutani, GoDaddy’s CEO and board member since 2019; Graham Smith, the former CFO of Salesforce (CRM); Leah Sweet, a former PayPal (PYPL) executive; and Sigal Zarmi experienced in digital transformation from her tenure at Morgan Stanley (MS). Such a well-experienced board provides security to the medium-term investment thesis, but such guidance may not be enough to mitigate the long-term competitive threat from Shopify.

Shopify Risk

Shopify is consolidating its position aggressively, challenging GoDaddy by fundamentally altering the customer acquisition funnel and redefining the competitive landscape. Historically, GoDaddy relied on domain registration as the entry point for small businesses, upselling higher-margin services like hosting, email, and website building. However, Shopify has flipped this model by positioning itself as the go-to platform for entrepreneurs who prioritize e-commerce functionality first, such as setting up a store and transacting online, with domain registration becoming secondary or even unnecessary. This shift erodes GoDaddy’s control over the top of the funnel, reducing its ability to cross-sell ancillary services that drive customer lifetime value and profitability.

In addition, GoDaddy’s e-commerce capabilities are much less sophisticated than Shopify’s, with limited customization options and fewer built-in tools for enterprise-level needs. Therefore, GoDaddy may be left to compete in the lower-value DIY segment while Shopify dominates the higher-value customers.

Shopify’s dominance is also likely to compress GoDaddy’s gross margin further—over the past five years, its gross margin has declined in large part due to competition from platforms like Shopify and Wix. Given Shopify’s ongoing dominance, GoDaddy’s ability to grow its annualized recurring revenue from add-ons like hosting and email could be materially impaired. Therefore, GoDaddy likely needs to invest heavily in its innovation and technology to remain competitive moving forward, and this could put pressure on its EBITDA margins in the next five years, worsening the negative margin of safety indicated in my valuation model.

Conclusion: Hold

Even in an optimistic, conservative valuation model, GoDaddy is only likely to deliver an enterprise CAGR of approximately 8.5% over the next five years. This is the primary reason why my rating is a Hold. However, looking longer-term, the risks with the competitive threat from Shopify are a real concern, and I expect that the investment GoDaddy will have to make to remain competitive will open up periods of margin instability and valuation volatility in the medium to long term.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post GoDaddy Is Overvalued Amid Competition From Shopify appeared first on Up2info.com.

• I’m bullish on GoDaddy because of its strong free cash flow generation, projected to reach $1.6 billion in 2025, making its 18x valuation enticing.
• I believe GoDaddy’s focus on pricing, bundling, and AI-driven innovations positions it for sustained revenue growth and profitability.
• I recognize that GoDaddy’s $3.1 billion net debt is a risk, but its operational efficiencies and consistent cash flow mitigate my concerns.
• I am closely monitoring GoDaddy’s ability to maintain 6-8% annual revenue growth, as this is critical to my investment thesis.

Investment Thesis

GoDaddy (NYSE:GDDY) has a lot going for it. It’s a business that investors haven’t been too bullish on; hence, the stock is still reasonably priced.

More specifically, I make the case that paying 18x next year’s free cash flow for GDDY makes sense.

That being said, I note that this investment thesis is not blemish-free as its balance sheet carries a fair amount of debt.

And yet, I believe that there’s a lot to be bullish about GDDY and that over the next several months investors will look back to $198 per share as a cheap price to be involved with this stock.

Rapid Recap

Back in October, prior to its earnings results, I said:

I remain bullish on GoDaddy, despite noting that it’s not the most enticing stock in the market, but it’s not a bad pick either.

GDDY is a stock that I’ve been bullish on for a while. The thesis here is straightforward. This is a business that many investors have low expectations, even though it makes a lot of free cash flow.

GoDaddy’s Near-Term Prospects

GoDaddy empowers entrepreneurs by providing them with tools and services to establish and grow their online presence. They offer a range of products, including domain registration, website building, and hosting. They strive to allow small business to build their online presence.

GoDaddy is simple to use and bundles valuable services to maximize customer success.

Moving on, GoDaddy is experiencing solid near-term growth, particularly in its Applications & Commerce segment, where bookings have grown by 20% y/y. The company forecasts annual revenue growth of 6-8%, with expanding EBITDA margins expected to reach 33% by 2026.

Innovative initiatives such as pricing and bundling are driving free cash flow growth and increasing the adoption of new services like the GoDaddy Digital Marketing Suite and Airo.

Given this background, let’s now discuss its fundamentals.

The Main Question: What Does 2025 CAGR Look Like?

This is what I said in my previous analysis:

My questions from the previous analysis stand. Allow me to be blunt. Specifically, I have one question in my mind. What sort of growth rates can we expect from GoDaddy in 2025?

Needless to say, the comparables next year will be rather tough. Or better said, tougher than this year, at least! This will lead to a natural deceleration in its growth rates.

But at the same time, the pace of deceleration matters. For my part, I don’t believe we are going to see 7% y/y topline growth in 2025. But at the same time, consider what analysts following this stock are estimating.

For now, analysts are still expecting to see 7% topline growth in 2025. And, if indeed, the analysis is right, this would meaningfully strengthen the bull case for GDDY.

With that in mind, let’s now discuss its valuation.

GDDY Stock Valuation – 18x Forward Free Cash Flow

As an Inflection investor, I’m always thinking about the company’s financial footing. On this front, GDDY with a net debt position of $3.1 billion doesn’t fare too well. This means that about 11% of its market cap is made up of cash.

I’m happy to compromise in the right instance, but for me, this blemish keeps me away.

Beyond that, I like the fact that GoDaddy oozes free cash flow. For 2024, GoDaddy’s free cash flow points to close to $1.4 billion. Now, this is where things can get a bit tricky.

For now, I’ve assumed that since GoDaddy’s free cash flow is likely to end up 27% y/y relative to 2023, it’s difficult to assume this sort of improvement continue into 2025. After all, most of the efficiencies will have already been picked over in 2024.

That being said, for now, I am for the most part satisfied to assume that GoDaddy could raise its free cash flow line by 10% y/y. This means that GoDaddy could probably deliver around $1.6 billion of free cash flow in 2025.

In sum, investors today are paying around 18x forward free cash flow. A figure that is clearly enticing for a stably growing business.

Investment Risks

The main aspect that could significantly impair the bull case will be if, in 2025, GoDaddy’s revenue growth rates end up being too insignificant. Basically, anything less than 3% topline growth, and I would call it a day on my bull thesis.

Furthermore, keep in mind that GoDaddy operates in a highly competitive space, facing strong rivals like Wix (WIX) too. Recall, that Wix also offers hosting solutions.

Next, GoDaddy differentiates itself with a broader suite of bundled services, while Wix emphasizes design flexibility and ease of use. But also, there are many other peers in this space that are vying for market share. It’s a highly fragmented sector, and for the most part, they are forced to compete on pricing too, which would impact GoDaddy’s ability to deliver strong growth in 2025.

The Bottom Line

Paying 18x forward free cash flow for GoDaddy is a compelling investment because it offers a stable, cash-rich business with clear growth prospects.

With free cash flow expected to reach $1.6 billion in 2025 and EBITDA margins expanding towards 33%, GoDaddy demonstrates strong operational efficiency and profitability.

Despite its leveraged balance sheet, the company’s consistent revenue growth makes this valuation attractive for a business delivering durable cash flow generation.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• I believe GoDaddy is reasonably priced at 13x next year’s free cash flow, reflecting its stable business model.
• The heavy debt burden will weigh on GoDaddy’s ability to rapidly return capital to shareholders.
• I see potential for GoDaddy’s AI-powered tools to enhance long-term growth and profitability.
• Despite intense competition, GoDaddy’s strong brand and diverse offerings provide a solid foundation for future growth.

Investment Thesis

GoDaddy (NYSE:GDDY) is not a business that one would call a fast-growing business. And yet, it’s still delivering some topline growth. And while the investment thesis isn’t blemish-free, there’s still a lot to like about this stock, even now.

More specifically, the bear aspect is rather obvious, with more than 15% of its market cap being made up of net debt.

However, I make the case that this consideration, together with its slow growth prospects, is more than factored in by the fact that GoDaddy is priced at 13x next year’s free cash flows.

In sum, I remain bullish on GoDaddy, despite noting that it’s not the most enticing stock in the market, but it’s not a bad pick either.

Rapid Recap

Back in June, I said:

GoDaddy has a lot going for it. And yet, to say that this is a blemish-free investment would be to misconstrue reality. Ultimately, GoDaddy carries more than $3 billion of net debt, which hinders its ability to in the near-term significantly return capital to shareholders.

And yet, the business is undeniably reasonably priced.

GDDY is a stock that has continued to perform strongly against the S&P 500 after my bullish recommendation, up 12% versus 5% for the index.

And as we go through this investment thesis, you’ll see that I’m still bullish.

GoDaddy’s Near-Term Prospects

GoDaddy is a provider of domain registration and website building to support small businesses and entrepreneurs.

GoDaddy provides tools and services that help small businesses establish an online presence. Its offerings span domains, hosting, and e-commerce solutions. GoDaddy’s value proposition lies in its ability to simplify complex technical processes, enabling entrepreneurs to launch and manage their digital presence without much technical knowledge.

In the near term, GoDaddy’s growth prospects are supported by its robust innovation strategy and strong momentum in key areas such as Applications and Commerce, which saw 24% growth in Q2. Its AI-powered tools, such as GoDaddy Airo, are driving new customer engagement. The focus on bundling, pricing, and optimizing user experience has bolstered customer retention and conversion rates, positioning GoDaddy for high-single-digit growth rates in the near term (this will be discussed more, soon).

However, GoDaddy also faces headwinds in an intensely competitive landscape. It operates in a sector with strong rivals like Shopify (SHOP), Wix (WIX), and Squarespace (SQSP), which offer similar services, often targeting the same small business customers.

This competition exerts pressure on pricing and the need to remain focused on delivering consistent improvements in the customer experience.

GoDaddy Is Still Delivering Some Growth Rates

GoDaddy raised its full-year revenue outlook a hair. Consequently, this implies that this year, GoDaddy is expected to grow its revenue growth rates by 7% y/y in each one of its quarters.

This will be the first time in two years that investors could rely on GoDaddy to deliver high single-digit growth rates on a consistent basis.

And this takes us to my core argument. It doesn’t matter as much how high the overall growth rate ultimately reported is, as much as it matters what the expectations of the revenue growth rates are. How well can investors quantify its growth rates? Do investors buy into these growth rates?

And if they do, then, the multiple that investors are willing to pay up for a turnaround story can rapidly increase, beyond what at first looks like common sense.

GDDY Stock Valuation – 13x Forward Free Cash Flow

As an Inflection investor, you must have an understanding of a company’s balance sheet. This is a simple check that takes a few minutes. Literally, a few minutes, but saves a ton of capital in the long run. Don’t overcomplicate. Generally speaking, I like to back companies that have at least 10% of net cash.

And on this front, GoDaddy scores poorly, with about $3.4 billion of net debt. This means that not only is its balance sheet not in a net cash position, but in actuality, more than 15% of its market cap is made up of net debt! That’s heavy.

And this means that GoDaddy’s ability to return excess cash to shareholders is hampered in the near term. That’s the bad news.

And now, let’s discuss the bullish aspect. GoDaddy raised its free cash flow outlook for 2024 from $1.40 billion to at least $1.45 billion. Naturally, this means that there’s a high likelihood that when 2024 is done and dusted, the figure reported will be $1.5 billion of free cash flows.

Therefore, I believe it makes sense to grow out this free cash flow next year by around 10% relative to 2024. Why 10%? Because the business is most likely growing next year at approximately 5% on the top line, together with some further cost efficiencies, leading to improved operating leverage.

Therefore, I estimate that GoDaddy could see around $1.65 billion in free cash flow in 2025. This leaves this stock priced at 13x next year’s free cash flow.

A very reasonable entry point for new investors to the name.

The Bottom Line

Paying 13x next year’s free cash flow for GoDaddy is an attractive valuation given its stable topline growth and consistent ability to generate free cash flow.

However, the significant net debt load, which makes up more than 15% of its market cap, limits the company’s ability to return cash to shareholders in the near term.

While the valuation suggests strong potential for long-term gains, GoDaddy’s balance sheet will continue to restrict immediate capital returns.

In sum, GoDaddy is well-positioned to generate steady cash flow, but it needs to clear some financial hurdles before it can truly cash in on its clicks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Strong Investment Potential

My Marketplace highlights a portfolio of undervalued investment opportunities – stocks with rapid growth potential, driven by top quality management, while these stocks are cheaply valued.

I follow countless companies and select for you the most attractive investments. I do all the work of picking the most attractive stocks.

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As an experienced professional, I highlight the best stocks to grow your savings: stocks that deliver strong gains.

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• Initiating GoDaddy at a sell rating, and recommending investors take profits after a sharp YTD rally on this stock.
• GoDaddy’s growth rates are slowing to single digits, and its services are highly commoditized with intense competition from Wix, Squarespace, and WordPress.
• Activist investor Starboard Value has also trimmed its position in GoDaddy after pushing for changes late last year.
• The stock’s revenue multiple sits above most of its peers, and is overvalued for such minimal growth prospects.

With the stock market stretching continually toward new all-time highs, it has become more important than ever, in my view, to exercise careful stock-picking. In particular, we should take a close look at some of this year’s biggest tech winners and determine if there is really any fundamental driver for them to continue their win streaks.

GoDaddy (NYSE:GDDY), the website hosting service, has reached the end of its rope. The company began its win streak late last year, after activist investor Starboard Value pushed for changes at the company, including a possible sale. Though no acquisition offer has been floated, GoDaddy has risen more than 50% year to date, and Starboard, apparently satisfied, has trimmed its position in the company in Q2. That, in my view, is a strong signal that investors should do the same.

I’m initiating GoDaddy with a sell rating and recommending investors lock in gains on this position and invest elsewhere. Buying medium-term (6 to 9 month duration) puts on this name may be another way to capitalize on potential downside.

My pessimism on GoDaddy is predicated on a number of factors:

• GoDaddy’s growth rates are slowing to the single digits, and its service is almost entirely commoditized. The company faces a number of competitors including Wix.com, Squarespace, WordPress, and a number of others. These offerings are highly commoditized and have almost no differentiation. In addition, with potential macro threats looming, many smaller businesses and SMBs may fail, leading to a risk of higher churn as well as slower new account additions.
• Steep valuation. GoDaddy trades at excessive multiples of both revenue and EBITDA, despite the fact that its growth rates have tapered off to the single digits. This is added on top of the fact that the company is shouldering a substantial debt load (most of which is fixed-rate, and thus the company won’t benefit substantially from recent interest rate cuts).

Steer clear here and sell this stock.

Unimpressive growth rates demonstrate a staid, commoditized industry

Among the software and technology industries, GoDaddy arguably has one of the easiest business models to understand. The company offers website-building and hosting software, perfect for smaller entrepreneurs who are looking to set up websites for the first time. The company’s services include:

• Buying and selling website domains, for a small $5/annual fee
• Website builder with drag-and-drop templates, starting at $10/month
• Website hosting, starting at $6/month

Recently, the company has been focusing on its “Applications and Commerce” segment which features more purpose-built, plug-and-play templates like online stores. Management views this faster-growing segment as an upsell play, as a GoDaddy storefront starts at $21/month.

Despite the plethora of offerings, we can’t escape a number of cold facts. First, growth is entirely unimpressive. The chart below shows that GoDaddy’s revenue growth has slowed to just 7% y/y in its most recent quarter:

Slow growth is a symptom of the fact that website building and hosting is a decades-old market and has now been saturated by a number of highly competitive players. GoDaddy’s considerable list of competitors includes a number of equally recognizable brands, such as Squarespace, WordPress, Wix.com, and several others.

Squarespace, in particular, is a highly reviewed and formidable competitor. A recent Forbes review of competing options notes that while GoDaddy has a slight price advantage to Squarespace, the latter features easier and sleeker drag-and-drop interfaces that make it much easier for a first-time website builder to use.

The company is touting its Applications & Commerce segment as an important vehicle to future growth. A&C ARR grew 14% y/y to $1.5 billion in the most recent quarter, just over a third of the company’s $3.8 billion in annual recurring revenue.

And yet we can’t ignore the fact that when it comes to building storefronts, GoDaddy faces more specialized competition as well. Shopify (SHOP) is perhaps the best known of the dedicated e-commerce website builders, with pricing starting at $30/month, but including very critical PoS (point of sale) capabilities to process sales.

Looking ahead to FY25, Wall Street analysts are expecting GoDaddy to continue plodding on at a 7% y/y growth pace. And given the number of competitors in the market offering these commoditized services, it’s unlikely that GoDaddy has any pricing power to grow revenue by lifting its rates.

Premium valuation for lackluster growth

At this juncture, we have to step back and ask ourselves: why exactly has this stock skyrocketed >50% year to date when it has delivered, at best, ho-hum boring performance?

We should additionally note as well that unlike many tech peers, GoDaddy finds itself in quite a large net debt position, stacking up to $3.4 billion in net debt as of the most recent quarter. It’s worth noting too that 87% of this debt is at a fixed rate, so GoDaddy doesn’t stand to benefit much from recent rate cuts.

Now let’s dig deeper on valuation. At current share prices near $160, GoDaddy is trading at a market cap of $22.5 billion. After adding in the $3.4 billion in net debt showcased above, the company’s resulting enterprise value is $25.9 billion.

And as shown in the chart below, the company is guiding to $4.525-$4.565 billion in revenue this year (representing 7% y/y growth), and an adjusted EBITDA margin (unlike most of its peers, the company refers to this metric as “normalized EBITDA,” or NEBITDA) of 29%, or $1.32 billion, and a similar “$1.3+ billion” FCF multiple.

This puts GoDaddy’s valuation multiples at:

• 5.7x EV/FY24 revenue
• 20x EV/FY24 adjusted EBITDA
• 20x EV/FY24 FCF

We note that the company’s revenue multiple sits above all of its publicly traded peers, save for Shopify (SHOP) which deserves a premium for its much faster 20%+ revenue growth rates.

Key takeaways

With slow single-digit growth rates, a highly competitive industry that doesn’t give GoDaddy much room for greenfield expansion opportunities, and a rich valuation that sits above most of its peers, it’s a small wonder why Starboard chose to shrink its stake in GoDaddy this year after an impressive year-to-date run up. I’d suggest you do the same and trim this holding to invest elsewhere.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post GoDaddy: Terrible Value For A Commoditized Service With Limited Growth appeared first on Up2info.com.

• GoDaddy’s recent stock surge is driven by historical income growth and new AI tools, as it re-prices following chronic undervaluation from 2018 to 2023.
• The company’s strong fundamentals, including rising sales, income, and operating margins, justify its current valuation, though debt levels are a slight concern, attenuated by a lower rate outlook.
• Future growth depends on continued R&D and macroeconomic trends in e-commerce, with potential risks from a “website glut” and slowing retail sales.
• GoDaddy’s competitive position remains strong, but the stock’s upside is limited due to a high-growth outlook and potential excessive expectations from AI hype.

GoDaddy (NYSE:GDDY) has broken out into a high-momentum rally as investors have caught wind of its strong historical income growth and have renewed competitive hopes in the firm following its AI-generative tool development. The tool Airo allows customers to quickly generate domain names, logos, and websites. This is important because it gives GDDY positive exposure to the AI trade, or “AI bubble,” and highlights how the company wants to compete more directly for website building, hosting, and the online shopping platform space.

The stock has moved hyperbolically higher this year in response. Despite this, its sales growth is lower than during the “stagnant” years of 2018-2023, although its operating margins are rising. See below:

At first thought, I am cautious, and often bearish, on stocks with extreme rallies following the development of an “AI tool.” In my view, there have been many such companies over the past year, and not all will necessarily garner the long-term competitive advantage implied by their share-price growth. That may be the case for GoDaddy, as its competitors, like Squarespace (SQSP), have similar generative AI web development tools while Shopify (SHOP) is developing them.

That said, GoDaddy had strong growth across its segments over the past five years, which was not reflected in its stagnant stock. Looking at analyst commentary since 2018, significant bearish sentiment on GDDY revolved around its competitive risks. Although that risk remains relevant, the fact is that GoDaddy’s fundamentals were not under apparent competitive pressure from 2018-2023, with its cash flow, income, and sales all rising significantly. Thus, GDDY’s ongoing breakout may not depend on the “AI Bubble” (in my view) but a sharp price-discovery trade built on its historical fundamental growth.

If so, we must consider what GDDY might be worth, as its share price has moved so quickly that it may be far from its fair value. In my view, that depends less on its AI tools’ immediate impact but on its ability to continue R&D to maintain a competitive edge. We may also need to consider the broader macroeconomic trends facing e-commerce.

GoDaddy’s Fundamental Trend is Strong

Although reasonable to question how fast GDDY has risen, I also question why it failed to rise for five years despite sustained fundamental growth. This is reflected in both its per-share sales and income. See below:

The company’s sales, income, cash flow, and EBITDA all rose considerably per share from 2018 to today. At the end of Q4 2023, it released a deferred tax asset, giving over a billion dollars in one-time income. Still, we’ve seen both a rise in sales and an improvement in profit margins. Today, its price-to-sales is back near its previous long-term high, though its operating margins are nearly twice as high as they were, mitigating some overvaluation risk.

Over the past year, the company’s income and sales projections have continued to improve. Notably, previous estimates from 2022 have mainly proven accurate, giving some credence to the analyst consensus outlook. The company is expected to see a ~15% increase in sales over the next two fiscal years and a 38% EPS increase, mirrored by an improved EBITDA margin outlook two years ahead. See below:

These are all strong growth metrics, reasonably demonstrating GoDaddy’s past performance. Still, there is some volatility in these analyst estimates, likely because the competitive and economic factors impacting GoDaddy are complex.

Looking forward, I expect slower sales growth from GoDaddy but, ideally, more organic growth with stable profit margins. Much of the 2018-2023 period saw GoDaddy pursue inorganic growth through acquisitions, many of which used debt, giving the company a reasonable debt burden of $3.8B. However, its operating cash flow rose consistently over this period. More recently, its cash from financing has turned far more negative as the company repurchases shares. That may slow now that its valuation is higher, but it indicates the firm may have some dividend potential, which has not been discussed.

Its cash from investing is now back toward zero as its acquisition splurge ends. That said, its cash and ST investment position is smaller than it was, while its working capital is quite negative at -$1.4B. See below:

Overall, the company’s cash flow and balance sheet indicate it is transitioning from inorganic growth to newfound maturity. I believe the company would be best off raising its dividend from its high cash flow while using some portion to continue R&D spending to maintain a competitive moat.

The company’s negative working capital stems from significant unearned revenue. Most of GoDaddy’s income comes from domain renewals, giving it recurring subscription revenue, usually accrued over the year. This business model is relatively stable within a given year, so I do not think its negative working capital is a concern, as there are no indications it should lose customers anytime soon.

Still, its debt burden is somewhat of a concern. Its debt-to-EBITDA is around 4.2X TTM, while its Times Interest Earned is 4.5X. Those ratios are not concerningly high but are elevated compared to typical leverage for software-type companies. Since it does not have significantly securable assets, most of its debt is term loans with variable rates, effective rates in the upper 7% range today. However, given that the SOFR will likely decline over the next year, GoDaddy’s income may rise as interest on that debt decreases.

Reasonable Long-Term Competitive Outlook

The company’s immediate forward “P/E” is high at 23.6X. Analyst projections point to an $8.96 EPS by 2026, giving it a more reasonable long-term forward “P/E” of ~17X. The “consensus” of two analysts looks to a $16.3 EPS by 2029, giving it an even longer-term forward “P/E” of around 9.25X. Those projections reflect a 67% sales growth outlook over the next six years, indicating a continued rise in its sales and profit margins.

Although these are high-growth targets, they are on pace with the company’s trend in recent years. That said, GoDaddy has managed decent EPS and sales growth through acquisitions. Although those purchases have been generally accretive, they’ve left GoDaddy with enough debt that it can likely only continue to grow by reinvesting cash flow. Indeed, its CFO is strong enough that it is a reasonable assumption, depending on our outlook for market conditions.

If these projections pan out, I believe GDDY is fairly valued today. Despite its meteoric rise this year, I think it is predominantly a price-discovery trade based on its previously rising fundamentals. That said, I do not believe it is likely that GDDY will outperform these growth projections. We’d need to see increasing estimates for the stock to continue to rise, which, I think, is unlikely as its current growth expectations are reasonably high.

Although its generative AI platform is notable, I see that as a development that will help GoDaddy maintain its competitive moat. However, its competitors should be following in similar footsteps. Market share estimates for GoDaddy vary widely and seem to depend significantly on calculation methods; however, the company is generally seen as having the largest share, with Amazon’s (AMZN) AWS and Google Cloud (GOOGL) being in the top three.

Those two are undoubtedly large contenders but cater more to enterprises, while GoDaddy focuses on small businesses. It may have an advantage with AI in that market over its smaller competitors like BlueHost, Siteground, and others. Being much more significant than most of its peers, GoDaddy has a definite advantage in its ability to use R&D and strategic acquisitions to give its customers a broader set of options, allowing it to charge more. Although the soon-to-be private Squarespace and, to a lesser extent, Shopify and Wix (WIX) have similar economic scale advantages, it seems GoDaddy remains the go-to option in the niche.

As long as its management remains focused, I do not see significant competitive risk from GoDaddy. To me, its performance over the past five years shows that neither the large players like Amazon or Google nor the fast-growing alternatives like Shopify will hamper its position. Still, I think there is some risk that the immense growth of e-commerce will slow. Much of its historical growth and outlook depends on the assumption that there will be much greater e-commerce activity in the future. Although e-commerce continues to expand its retail sales position, its overall growth rate has slowed slightly. See below:

E-commerce sales rose only 1.3% last quarter, about twice as high as inflation over the same period. This market is expanding and has maintained its gains following the end of COVID lockdowns. Some data points to a 47% increase in the number of US e-commerce websites between 2022 and 2023, with similarly high growth over the years prior.

Although these statistics may be hard to calculate, depending on how an “e-commerce” site is determined, I believe it’s likely that e-commerce sales are not rising as fast as the number of e-commerce websites. In other words, there may be a potential glut as more people look to start e-commerce website businesses, but total economic demand for retail sales is not rising as fast. Keep in mind that total US retail sales, adjusted for inflation, have declined since 2021.

If there is a “website glut” as some data indicates, that would likely harm Shopify more than GoDaddy because GoDaddy caters to a wider market. Still, online stores are a key market segment for the company, and its AI platform primarily caters to small e-commerce businesses. To that end, I think GoDaddy’s rosy growth outlook may be too focused on the high historical growth of e-commerce during the pandemic, with that trend unlikely to remain so strong in the long run simply due to stagnant retail sales. The company’s CEO recently indicated that bookings are slowing, potentially indicating the slight business e-commerce tailwind may be reaching its peak.

The Bottom Line

Overall, I believe GDDY is fairly valued today but is at some risk of decline due to excessive sentiment surrounding AI and potentially unrealistic expectations regarding the long-term growth of e-commerce website demand. Certainly, its historical growth levels are great and support widespread assumptions of continued growth that justify its current valuation. Further, AI and the general trend of higher e-commerce sales may support its development. Still, I believe few analysts and investors are accounting for the possibility that web hosting demand is rising too quickly compared to e-commerce sales, possibly meaning some GoDaddy customers are not running profitable businesses and may shut down websites, particularly if the economy slows.

There is insufficient data on the e-commerce and web hosting markets to give a clear secular trend for the industry. Thus, my “website glut” view is mainly speculative, so I would not bet against GDDY or have an outright bearish opinion. Given its track record, I think its current price is reasonable, while its price in recent years seemed unreasonably low. Still, I see little upside in the stock today, with some risk associated with the retail e-commerce macroeconomic trend.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post GoDaddy: Growth At A Reasonable Price, But Website Demand May Slow appeared first on Up2info.com.

• GoDaddy’s transformation into an e-commerce enablement company has led to strong growth in sales and user revenue, with stock up 54%.
• Impressive growth seen in the Application & Commerce segment, driving strong sales and bookings growth, with a 15.3% y/y increase in Q2.
• Margin expansion outlook indicates near-term muted growth, with management expecting a slight contraction in NEBITDA margins for Q3.

Investment Thesis

GoDaddy’s (NYSE:GDDY) transformation into a full-stack, one-stop-shop web development tool has seen the former domain registry & web hosting company see strong growth in all of its top-line metrics so far, turning around the company’s vision to a full-fledged e-commerce enablement company for the masses.

The company’s Q2 results, announced earlier this month, added another feather to its transformational hat, adding another quarter of strong growth in sales aided by higher revenue per GoDaddy user. The impressive performance has resulted in a powerful show of performance in the stock market, with the company’s stock up 54%.

While I have been bullish on this name, and was encouraged by the strong increase in revenue and ARPU, I would have held on to my bullish rating had the company been able to project a stronger outlook for its earnings this year.

With GoDaddy’s stock already up 54%, I believe the company’s growth prospects are now priced in for the year, unless management can upgrade their long-term guidance down the road.

For now, I have upgraded my price targets while downgrading GoDaddy to a Hold.

Impressive Growth Continues In The Commerce Enablement Business

In my previous coverage on GoDaddy, I explained how GoDaddy had been taking advantage of its strong install base acquired from its web hosting business and upselling its brand new suite of e-commerce applications, payment solutions, and web development solutions to create a powerful all-in-one web development platform for the user.

In addition, the company also opened up the general availability of its AI tool, Airo, earlier this year to all users, which was also adding some momentum to the strong growth seen in its operational metrics. For the sake of context, Airo helps users rapidly scale their presence online by assisting them in building websites, logos, and scaling social media operations in real-time. All these capabilities were reorganized under GoDaddy’s Applications & Commerce business segment in 2021, which demonstrated double-digit growth last year while GoDaddy’s Core Platform segment remained flat.

The company’s recent Q2 results showed that users were continuing to spend incrementally on GoDaddy’s e-commerce applications and other solutions, with the Application & Commerce segment growing 15.3% y/y to $405.6 million, while its Core Platform business also saw single-digit growth, growing 3.2% to $718.9 million. The company’s total sales increased by 7.3% y/y to $1.12 billion, its strongest growth pace of sales in seven quarters.

At the same time, the company’s bookings, which are cash collected from customers for future services, increased by 11%, indicating expanded runways for revenue to continue growing down the road as demand for GoDaddy’s products remains elevated. Again, the Application & Commerce segment drove the bulk of the bookings volume, rising 24% y/y in Q2.

Management now expects 6.8% sales growth this year, as I noted in Exhibit B, up from the 6.5% growth they were initially expecting.

These results are very impressive for the decades-old Phoenix, AZ-based company that is continuing to reap the benefits of its big transformation.

Margin Expansion Outlook Indicates Near-Term Muted Growth

GoDaddy put up a strong show in their profitability department as well, which gets management closer to their FY24 expected adj. EBITDA margin targets of 29%.

In Q2, the company’s normalized EBITDA, or NEBITDA, grew 25.4% to $331.7 million, enabling management to deliver 430 bp of margin expansion to 29.5%. This was well above management’s own estimates for NEBITDA to be ~28% in Q2. On a GAAP basis, GoDaddy grew its operating income massively by ~52% to $214 million.

Unfortunately, these impressive results were still not enough for the company to meet the lofty Q2 GAAP EPS expectations of $1.08 per share, as it reported Q2 GAAP EPS of $1.01 per share.

For the third quarter, the company expects to deliver NEBITDA margins of ~29%, indicating marginal deceleration on a sequential basis. With the overperformance in Q2 on NEBITDA, it appears management might have some room to raise their cost profile slightly in Q3 to ramp up marketing expenses. This sequential flatlining or contraction in margins would depress the valuation premium in the near term, which would encourage current investors to trim their allocations or new investors to initiate or raise their positions.

Valuations Point To Muted Upside In GoDaddy

As I mentioned earlier, management expects FY24 revenues to grow 6.8% y/y. With the progress demonstrated in their A&C business as well as the return to growth in the company’s Core Platform business, I have raised my revenue growth rates through FY26 to be ~7.1% CGAR, up from the 6.7% CAGR I initially expected.

The increase in revenue would also raise the growth rates of its adj. EBITDA, now at 15.3%, up from the 14% CAGR I expected. This would have increased further had management raised the outlook of their adj. EBITDA along with their revenue growth rates. However, with the upgraded outlook missing in their EBITDA numbers, this will depress the valuation premium in the near term. My valuation model assumes a discount rate of 10.8%.

The 15.8% growth in adj. EBITDA would indicate the company warrants a forward premium of 28–29x forward earnings. However, the company holds ~$3.8 billion in long-term debt and $445 million in cash. Due to the strong growth in adjusted EBITDA, debt leverage ratios have dropped to 2.4x from 2.7x last year. Still, the net interest expenses of ~$169 million will weigh on the company’s valuation premium, which I estimate to be ~21x after factoring in their debt serviceability.

Therefore, assuming a forward PE of 21x, I believe the company can be valued at ~$184, up from the $162 I had valued it at in my last coverage. However, with just ~11% upside remaining, the majority of the gains for the year may have already been scored by its investors, and I expect a pullback in the stock soon.

Risks & Other Factors To Consider

My assumption for the near-term outlook depends on a stable economy that continues to spend, especially via digital platforms. This outlook would see GoDaddy’s customers continuing to spend on the platform’s tools to expand their suite of online e-commerce services. In addition, competition from peers such as Wix and Shopify can also impact GoDaddy’s growth, but for now, GoDaddy has been able to maneuver around its peers and deliver strong growth.

Additionally, my outlook is based on management’s tempered margin forecasts for Q3 coming in sequentially lower. Part of my reasoning here is also due to customer additions staying flat at 21 million, relatively unchanged this year. If the company is able to add more customers in Q3, it would indicate more scale in their revenue and margins since most new customers spend on GoDaddy’s A&C products. So far, their customer addition numbers are flat this year.

Takeaway

In the near term, I expect GoDaddy to take a break from its massive runup through the year after the company expects margins to slightly contract on a sequential basis. The tempered margin outlook indicates most of the gains for the year are mostly done unless the company is able to raise its guidance from current levels.

I expect a pullback in GoDaddy’s stock soon, which I view as healthy for the company’s stock given its 54% rise on the markets this year.

For now, I recommend staying on the sidelines, as I rate the company as a Hold.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in GDDY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post GoDaddy: Getting Giddy After A 54% YTD Gallop appeared first on Up2info.com.

• GoDaddy’s transition to focus on e-commerce capabilities with AI, from just selling domains and web hosting, has reinvigorated growth.
• Company is on track to achieve financial targets for revenue growth, margin expansion, and free cash flow.
• Valuations suggest strong upside potential for investors, despite competition and potential risks in the market.

Investment Thesis

It has been just over two years now since GoDaddy (NYSE:GDDY) underwent a significant transformation to add more value to users and business establishments that are entirely focused on conducting their businesses online. GoDaddy was once synonymous with domain registration and web hosting capabilities. This became extremely crucial because, with almost 21 billion customers using at least one GoDaddy product, market penetration had reached a saturation point and deceleration was picking up pace.

Since the transition, their focus on packing e-commerce capabilities with AI as the backbone of their tech stack has reinvigorated a re-acceleration in growth in the company’s online business, all in a difficult two years when macro conditions were uncertain for smaller establishments and entrepreneurs.

In my opinion, GoDaddy’s management is showing tremendous resolve in doubling down on their 3×3 Northstar targets—achieving 3 financial targets within the next 3 years, which I have expanded on below. I am encouraged by the transition story so far.

For now, I rate GoDaddy as a Buy.

Durable Revenue Growth Ramps

In an Investor Day presentation earlier this year, GoDaddy’s management laid out their vision for achieving three financial targets through 2026. The first target being discussed in this section revolves around building the ramp to benefit from durable revenue growth. Some of that revenue growth has already been demonstrated, as noted in Exhibit B below.

Heading into the 2022 transition year, GoDaddy was seeing its revenue grow at a ~13% CAGR rate between 2019 and 2021. Part of the tailwinds in those three years was also the surge in getting more businesses online as the world emerged through the pandemic. But growth immediately slowed, and management was faced with the reality of a rapidly maturing domain purchasing & web hosting market. At the same time, its Business Applications segment, as part of the pre-2022 business segment organizational structure, was growing at a sharp ~19% CAGR between 2019 and 2021. In the 2022 reorganization, the company doubled down on adding more capabilities to customers who had already used GoDaddy to purchase domains and host their websites.

As part of its growth, the company has expanded its e-commerce and AI capabilities to make it easier and more productive for entrepreneurs and businesses to manage operations online. GoDaddy launched Airo last year, which allows customers to build and customize marketing, logo creation, and website creation using AI. The company has been making Airo generally available to more customers across markets this year, in addition to a host of e-commerce capabilities as well.

As seen in Exhibit B above, post-reorganization, their Core Platform, which contains domains and hosting products, remained flat between 2022 and 2023. However, their Application & Commerce [A&C] revenue segment, which houses their AI and e-commerce solutions, grew 12% y/y during the same period. Management had revealed that they expect to see growth coming from AI initiatives such as Airo as well as Commerce applications supported by inventive pricing packages to tie customers down.

That strength continued in the first quarter results of FY24 this year, which can be seen in Exhibit D below, where revenue demonstrated a strong 7% growth, coupled with higher ARPU. While GoDaddy’s customer volume stayed flat at ~21 million, it’s clear to me that customers have been busy spending incrementally more on GoDaddy’s products. Bookings also increased by a massive 9% y/y in Q1 FY24, which is very impressive. More impressive was the fact that Applications and Commerce bookings surged 22% y/y in Q1, per management commentary.

On Track to Deliver Strong Margin Expansion

The second target that the company has set its eyes on is expanding EBITDA margins. Part of its Investor Day narrative was also focused on detailing how beneficial the Application and Commerce segment was, not only to its top line but also in terms of margin expansion.

While GoDaddy delivered a 4% boost in adjusted EBITDA margins, with adj. EBITDA growing 25% to $313 million, as seen in Exhibit E above, the silver lining lay in the main driver of their adjusted EBITDA margin expansion. On the call, management mentioned that:

Overall, if you look at Q1, we’ve always said accelerated A&C will be a tailwind to our ability to expand our margins over time. And with the pacing you saw in Q1, we saw some of the benefit of that.

For the year, we’re on track for the 31% to exit and we feel good about that and we’re on track for the 29% for the entire year. And obviously we’ve talked about our ability to expand that going out. And all those — all that framework remains in place and we continue to see the benefit of the A&C tailwind related to that.

This points to the top-line and bottom-line benefits that GoDaddy is experiencing from the mix-shift in Application and Commerce segments. The company also expects its EBITDA margins to benefit from commerce, inventive pricing packages and its AI applications as pointed out in Exhibit C earlier.

Additionally, I note that the company delivered robust growth in FCF margins as well as their third target. Unlevered free cash grew 26% y/y to $327 million in Q1 FY24. The company is targeting at least $1.4 billion in unlevered free cash by the end of the year, according to their investor day presentation, which translates to 12–13% y/y growth in FY24, per my calculations. That implies at least 1.5% of incremental FCF margins on an unlevered basis.

Valuations point to Strong Upside

Here is a screenshot of what management is aiming for in their 3×3 targets – revenue, EBITDA and FCF by FY26:

Based on the sales & booking momentum the company has demonstrated in the last few quarters, GoDaddy should be able to easily achieve this target. In fact, I believe the company still has room to penetrate their own network of 21 million customers with their A&C products. This could easily scale the 7% CAGR mark, but, being conservative, I’ve estimated a CAGR of 6.7% through FY26.

Over the same investment horizon, its adj. EBITDA could double the pace of top-line growth with the large-scale efficiencies demonstrated by the company as well as the mix shift towards A&C products that should boost margins. Through FY26, earnings could clock ~14% CAGR.

Currently, the company carries ~$3.8 billion in long-term debt split between term loans and senior notes, as illustrated in Exhibit H below. I estimate the company will be incurring ~$180 million in interest expense, which will dilute the net adjusted EBITDA investors get to value. So that will impact valuation multiples. I must point out that the company is still able to easily service its debt, given its strong EBITDA growth rates. While today, the company’s leverage ratios stand at a healthy ~3.4x, on an adjusted EBITDA basis, leverage could easily trend to a superior ratio under 1 at current EBITDA growth rates. This is also assuming the company does not take on more debt in the future.

Discount rates stay at 11.3%, while normal share dilution rates imply a future share outstanding volume of ~147 million shares.

My model assumes a ~19x forward valuation multiple given the ~14% CAGR growth I expect in its earnings, after accounting for all debt servicing as mentioned earlier. This implies a 15–16% upside from current levels.

Risks & Other factors to consider

As GoDaddy expands its capabilities, it will increasingly start encroaching on a multitude of players in the website building and e-commerce capabilities space. It faces direct competition from Wix (WIX) & Shopify (SHOP) in website creation and management solutions, as well as strong competition from legacy players such as Block’s Square (SQ), PayPal (PYPL), Stripe, etc. While current bookings and ARPU growth are not showing signs of slowing down yet, it is possible that GoDaddy’s direct and indirect peers may move to re-acquire customers or compete with GoDaddy, making the company’s task of reaching its 3×3 targets more difficult.

Takeaway

In my view, GoDaddy appears to have now passed its inflection point and is impressively tracking its path to the 3×3 targets that it has set out to achieve by 2026. All three targets—revenue, EBITDA, and free cash—have demonstrated encouraging growth trajectories so far, and I feel confident in management’s ability to drive the company towards its goals.

I recommend a Buy on GoDaddy.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post GoDaddy: Scaling Its 3×3 Targets With Robust AI Capabilities appeared first on Up2info.com.

• I believe GoDaddy Inc.’s valuation at approximately 15x forward free cash flow offers a positive risk-reward opportunity.
• Despite carrying over $3 billion in net debt, GoDaddy’s strategic initiatives and product innovations position it well for future growth.
• The company’s focus on enhancing customer experiences and simplifying tasks for entrepreneurs drives strong performance, particularly in the Applications and Commerce segment.

Investment Thesis

GoDaddy Inc. (NYSE:GDDY) has a lot going for it. And yet, to say that this is a blemish-free investment would be to misconstrue reality. Ultimately, GoDaddy carries more than $3 billion of net debt, which hinders its ability to in the near-term significantly return capital to shareholders.

And yet, the business is undeniably reasonably priced. In a market where few stocks are priced at anything less than 20x forward free cash flows, GDDY is priced at approximately 15x next year’s free cash flows.

Briefly, there’s a lot to like about this investment thesis, and I believe it offers investors a very positive risk-reward. More specifically, I declare that investors will in time look back to $143 per share as a low entry point for this stock.

Why GoDaddy? Why Now?

GoDaddy’s platform provides entrepreneurs with tools and services for building websites. Their goal is to create inclusive opportunities for small and medium-sized businesses. They focus on simplifying tasks for their customers, such as website creation and ecommerce store management, through technology to streamline processes and improve user experiences.

In the near term, GoDaddy is seeing strong growth, particularly in its Applications and Commerce segment, where bookings have accelerated significantly. They have implemented strategic initiatives like enhancing pricing and bundling capabilities and launching new products like GoDaddy Airo and GoDaddy Smart Terminal Flex. These efforts are expected to increase their free cash flow, positioning them well for 2024 and into 2025.

However, GoDaddy faces challenges in this space, including intense competition in the web services market. For example, one top competitor is Wix.com (WIX), but numerous other competitors offering similar website-building and e-commerce tools are available, which puts pressure on GoDaddy to continually provide superior value to attract more customers. In short, there’s a rather shallow moat.

Given this balanced background, let’s now discuss its fundamentals.

GoDaddy Expected to Deliver High Single-Digit Growth Rates

GoDaddy was once a business that one could depend on for double-digit revenue growth rates. Today, its growth rates have all but evaporated. But not quite. And therein lies its bull case.

What investors want is some growth. But beyond that, investors crave and demand certainty. Once investors vaguely know what they are getting, they can start to price it in.

And after that, if the business suddenly starts to deliver some topline acceleration beyond expectations, then, the stock becomes suddenly compelling and investment-worthy. That’s the premise of GoDaddy.

This is a business that is on a path for high-single digit growth rates. However, since its valuation isn’t too demanding, investors are being offered a good risk-reward, a topic we explore next.

GDDY Stock Valuation — 15x Forward Free Cash Flow

I’ll discuss the negative and positive aspects of its valuation. Firstly, the negative aspect.

GoDaddy carries approximately $3.2 billion of net debt. This debt is cumbersome. Yes, GoDaddy is eager to repurchase its shares, given its valuation is low enough for these repurchases to be accretive, but its ability to meaningfully return capital to shareholders is hampered by the fact that more than 15% of its market cap is made up of debt.

That being said, GoDaddy will probably make around $1.3 billion of free cash flow next year, which leaves its market cap priced at around 15x forward free cash flow. This is undoubtedly a fair valuation, even if GoDaddy’s underlying business prospects operate in a highly competitive environment.

All in all, there’s a lot to like here.

The Bottom Line

Paying 15x next year’s free cash flow for GoDaddy presents a positive risk-reward opportunity for investors due to the company’s robust growth strategy and strong financial performance. With an approximate 10 to 15% growth in free cash flow this year, plus given its significant acceleration in its Applications and Commerce segment, makes GoDaddy well-positioned for sustained profitability.

Their focus on innovative customer experiences, enhanced pricing and bundling, and strategic product rollouts like GoDaddy Airo and Smart Terminal Flex indicates potential for continued value creation.

Notwithstanding its competitive challenges, these initiatives underscore a solid trajectory, making the valuation an attractive entry point for investors seeking long-term gains.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post GoDaddy Stock: Cashing In On Clicks appeared first on Up2info.com.

• GoDaddy is expanding its e-commerce and digitization platform with the help of AI, which is driving growth and increasing margins.
• Aero the AI tools rollout in the March Investor Day drove a valuation re-rating that needs to be followed with financial results.
• Market expects an uptick in growth with 20% free cash flow gains.
• I rate the stock a Hold, the market may require execution of higher growth to warrant further multiple expansion.

Introduction

A few days ago I analyzed the Invesco S&P MidCap Momentum ETF (XMMO) and one of several of its holdings caught my attention given the higher EPS growth and a relatively low valuation (PEG). Thus, I decided to take a deeper look at GoDaddy (NYSE:GDDY) the website builder and domain company that is transforming into an e-commerce or digital platform boosted by AI.

What is GoDaddy

Sure, it’s a funny name and the company roots are based on registering domains and hosting websites, then expanding into building websites, and now providing digital commerce services along the lines of Shopify (SHOP) but perhaps with a broader focus on professional services. At present, the company has 21m users that generate US$206 per year i.e. recurring revenue. Growth comes from adding more customers and increasing the services charged per website. The Core Platform revenue is more mature with under 5% growth, while added Applications & Commerce (A&C) is growing at 13% and accelerating with the rollout of its AI function called Aero. The AI function is reportedly adding value via far more rapid and automized web design and functionality that also costs GDDY less to support and helps increase margins on an already solid operating leverage. Below are a few slides from the recent Investor Day that explain the company’s mission and strategy and basic drivers.

Performance

GDDY went public in 2Q 2015 and has gained over 400% with a long period of stagnation between 2018 and 1Q24 as seen in the first chart. Shopify and Wix.com (WIX) vastly outperformed to the point their price gains need to be on the right axes for comparison sake. In the last 3 years, GDDY has been a clear outperformer vs Shopify and Wix, and with recent gains post the March 2024 investor day where it provided the details on the Aero AI development.

Peer Comps

I gathered consensus data to build a comparison table to gauge growth and valuation in this sector. The companies have similar services and compete with digital entrepreneurs of various sizes. GDDY has lower revenue growth estimates with better margins and a discounted valuation vs many peers. However, the consensus upside is only 2% to year-end 2024 and may require analyst upgrades.

Consensus Estimates

The following table is a financial summary of key metrics as well as consensus forecasts for GDDY. The market has turned increasingly more positive on growth, margins, and cash flow post Investor Day when it presented its AI tools that may accelerate user interaction and ARPU as well as the overall addressable market as a more full-service e-commerce or digital platform such as Shopify. Consensus EBITDA growth has taken a step-up to 10% while cash flow over 20% in the next three years with a dip in 2025. It’s probable that if GDDY´s AI tools are as successful as the initial reaction suggests, the market will need to upgrade growth and price targets.

Cashflow

Management has delivered on this free cash flow target, with 20% growth as seen in the table provided on the recent investor day.

GDDY is not a high revenue growth company with a revenue CAGR of under 8% in the 2018-2023 period, instead, it has focused on free cash flow generation as seen in the FCF margin that grew to 29% in YE23 from 18% in YE18. This has allowed it to initiate and increase share buybacks reaching 30% of revenue in 2023, and I estimate GDDY can continue share buybacks at 25% of revenue or 5% of the current market cap.

The company, like many in the tech sector, uses stock-based compensation to reward and keep talent that passes through the income state and is largely a non-cash item that impacts EPS GAAP, thus a better gauge of growth and profitability is cash earnings. New shares issued as part of stock-based comp are significantly less than shares bought back.

Valuation

The market has a US$140 price target for YE24, which does not leave much upside. However, this is due to a very recent share price run post-Investor Day in March 2024 which may have caught many analysts off guard. On consensus results, the current price target has an implied cash PE of 22x and 0.7x PEG (PE to EPS growth) which indicates a relatively inexpensive valuation in my view.

For the YE25 price target, I increased the PEG ratio to 1x on YE25-26 growth, this drives a fair PE to 30x and a price target of US$189. I believe there is room for GDDY to continue to re-rate given its accelerating growth and cash generation plus share buybacks.

The main risk to further re-rating is in the execution of the AL tools, which should have a noticeable impact on margins this year.

Conclusion

I rate GDDY a Hold. The stock has largely incorporated an increase in expected growth and cash flow driven by the recent rollout of its AI tools. While there is room for further multiple expansion, the company may need to first deliver on this growth before further valuation gains, in my view.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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