GoDaddy: Fierce competition could make its future difficult (NYSE: GDDY)

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Investment thesis

Due to its unfavorable product reviews compared to its competitors, I believe that GoDaddy (NYSE: GDDY) may struggle to keep up with growing competition. Moreover, GoDaddy’s price to gross margin value is almost equivalent to those of Wix and Squarespace, while they have significantly stronger sales growth. For these reasons, I recommend a “sale” for GoDaddy.

Introducing GoDaddy

GoDaddy, Inc. is a provider of cloud-based solutions that helps people, businesses, and organizations build an online presence, connect with customers, and manage their efforts.

The Company offers applications as well as access to third-party products and platforms. It provides a number of solutions, including domains, hosting and presence, business apps, and integrated commerce.

Domain name registrations, aftermarket and add-ons are among its domain products. Shared website hosting, website hosting on virtual private servers and virtual dedicated servers, managed hosting and security. Websites + marketing, social media marketing and management are part of its presence offerings.

According to its latest annual report, revenues in 2021 were generated by:

  • Domains, 47%

  • Accommodation and attendance, 34%

  • Business apps, 19% (mainly from third-party productivity apps)

Historical performance

Growth rate (year over year)

Index

2019

2020

2021

last 4 quarters

Revenue

12%

ten%

15%

14%

Gross profit

11%

ten%

13%

12%

Source: Alpha Research

Margins (% of revenue)

Index

2019

2020

2021

last 4 quarters

Gross profit

65%

65%

64%

63%

Sales, general and administrative

23%

22%

22%

21%

research

16%

16%

18%

18%

Net revenue

4%

-14%

6%

seven%

Free Cash Flow Margin

21%

21%

20%

20%

Source: Alpha Research

According to its latest annual report, the 15% increase in total revenue was driven by a 2.8% growth in the total number of customers, a 9.7% growth in ARPU (average revenue per unit/user) and increased revenue from acquisitions. The 2.8% growth in the total number of customers seems rather low, which I will discuss in more detail later in this article.

Its net profit margin is relatively low, but positive and improving.

Market Outlook

The COVID pandemic has had a significant impact on the hosting and web hosting market. E-commerce sales grew by $244.2 billion, or 43%, in 2020, the first year of the pandemic, from $571.2 billion in 2019 to $815.4 billion in 2020, according to the latest ARTS 2020 report. Additionally, individual consumers were spending significantly more time at home. As a result, existing web services have seen a significant increase in traffic. Additionally, time spent at home has allowed entrepreneurs to work more on ideas online. According to a report by Fortune Business Insight, the global web hosting services market is estimated to have reached $83.99 billion in 2021.

I expect the web hosting market to grow significantly in the long term as well, driven by trends such as the growing use of the internet and e-commerce globally, the increase in functionality required web hosting packages and increasing business online presence. However, I think in the short term it might be difficult to sustain the growth rates seen during the COVID pandemic, as the same causes mentioned for the increase in revenue during the pandemic might stagnate or even reverse a bit after COVID.

Competition and Product Review

As the “online presence” market is a large market with very high growth rates, the competition is intense and is getting more and more intense as new entrants try to capture their market share. Actors from several companies are

• Domain registration services and web hosting solutions from Donuts, United Internet, Namecheap, WPEngine, Bluehost and Hostgator;

• Website creation and management solutions from Shopify (SHOP), Squarespace (SQSP) and Wix (WIX);

A comparison of domain registrars shows that GoDaddy is the absolute dominating leader when it comes to the domain registration industry:

Domain Registrar Statistics

Domain Registrar Statistics (domainstate.com)

I believe part of the reason it’s such a dominant player is its successful marketing through its many Superbowl commercials between 2005 and 2015. Still, a large user base doesn’t have to correlate to quality of the products offered.

I think GoDaddy services are rated very negatively by Reddit users (Source 1, Source 2). Arguments cited include poor service, slow load times, lack of complexity, and high prices. The same sources mention other services that offer better features and support for a cheaper price, such as Squarespace, Shopify, and Wix.

A comparison between Shopify and GoDaddy claims that GoDaddy lacks advanced commerce features for ease of use. You can only add 5,000 products to your GoDaddy online store, and neither user engagement nor VAT spend can be tracked. You can only connect your business to UPS, Shippo, and DHL for shipments. In contrast, you can have an infinite number of products in your Shopify store, along with various product variations (like color and size). It also has an abandoned cart recovery tool, which encourages customers to complete a transaction if they leave your website without paying. It’s integrated with many major shipping companies, including USPS, DHL Express, UPS, and Canada Post, and you can print labels if you’re headquartered in the US, allowing you to customize your shipments. Also, the comparison claims that GoDaddy templates are rather simple, while Squarespace is said to have many flashier templates. Another source claims that Wix has a much more comprehensive editor than GoDaddy. Overall, I think the products from Wix, Shopify, and Squarespace seem to offer more comprehensive and advanced features than GoDaddy.

I believe that the expertise and level of expectation of consumers using websites will increase in the future. As a result, I believe customers will be drawn to the more advanced features of the mentioned competitors’ products.

Although GoDaddy has been able to quickly market its brand as the best web hosting and domain provider due to heavy marketing, I believe they are not immune to growing competition from these other providers. , who are really working on building awareness for their brand. This may be why GoDaddy only grew its total customer base by 2.8% in 2021.

Comparison of valuations and other statistics

I calculated several statistics related to valuation and financial performance and compared them to companies active in the same market:

PS report

P/E ratio

Gross margin

Price to gross profit

Sales growth over 3 years

come on daddy

2.88

40.99

63%

4.57

13%

Shopify

8.17

260.85

53%

3:42 p.m.

60%

Wix

2.68

61%

4.39

26%

square space

3.81

83%

4.59

27%

Source: Alpha Research

GoDaddy seems to be the more established company in its later business phase as it is already profitable but has a lower sales growth rate. However, leaving aside the profit margin, the gross price-to-earnings ratio is almost equal to the valuation of Wix and Squarespace, despite having much higher sales growth rates. Also, as stated earlier, I think GoDaddy will have a hard time competing with its competitors.

Factors likely to drive up the price

GoDaddy is the only company in the competing group that still has a manageable P/E ratio. Although I believe that its future competitive position will be rather weak, it could be that the product offerings continue to not only attract new customers, but also retain and increase existing customer revenues. Revenues from current customers have increased significantly in 2021. This indicates pretty strong customer relationships. This could potentially see them become a decent P/E company, which could push their price up significantly.

Final take

Personally, I wouldn’t feel comfortable holding GoDaddy stock in my portfolio, as other competitors’ prices are almost the same when it comes to evaluating price versus gross margin, while having in my opinion much better growth prospects. For these reasons, I have set the GoDaddy stock recommendation to “sell”.

Martin E. Berry