Description

Thesis-

Not my proudest work, if you are familiar with GDDY, there is likely little of interest below .  If new to the story, the following might be helpful.

I think GoDaddy has decent odds of producing a mid-teens IRR over the intermediate term.  Long known for its domains and hosting, GoDaddy has been spending capital and resources to build out its website building tools: Websites + Marketing and Managed WordPress.  Given the traffic flow for domains, GoDaddy should be able to upsell customers into its higher value website tool with little incremental cost. 

Business Description –

GoDaddy participates in the domain registration, hosting, website building, and business applications market.  The company has 82.7 million domains under management, and 22% of all domains are registered by GoDaddy.  Total customers were 20.6 million at year-end 2020.  Customer retention has been greater than 85% for each of the past five years.  Customer retention for those with the company for more than 3 years was 93%.  The company breaks its business down into three categories: domains; hosting and presence; and business applications.  

·         Domains – 46% of 2020 sales – includes the sale and renewal of domain names, aftermarket domain sales (which is seeing significant growth, 10% of total sales) and ancillary domain services.

·         Hosting & Presence – 36% – includes Websites + Marketing (W+M) and Managed WordPress offerings (though the compents of these products are re-allocated to segments, but the bulk resides here I believe).  Also included in this segment is traditional hosting.

·         Business Applications – 18% – Office 365 resale, telephony, email.

Domains & Hosting –

In general, investors consider domain registration and hosting as commodity businesses, and I can’t find any evidence to refute that assumption.  The customers do appear to be sticky, but the ability of GoDaddy to take price is limited.

As likely expected, global domains have grown consistently over time.  For the past 10 years, all domains names grew at a 6.0% CAGR, for the past five this figure is 3.1%.  Comparable figures for .com and .net are 4.6%, and 3.4%.  I have no insight into why there has been a slowdown, but overtime, I would expect the number of sites to be a function of internet connectivity, population growth, and business formation.  As seen in recent press reports, business formation, particularly for single employee businesses has been very strong.

For .com and .net, GDDY pays VRSN as the register.  The fee for .com paid to VRSN has been the same since 2012 - $7.85.  However, effective 9/1/2021 this fee will be increasing to $8.39, and likely 7% p.a through 2024.  The agreement between VRSN and ICANN also allows for 10% price increases for .net p.a. through 2023.  These fees are large sources of cost for GDDY.  The company paid $645 million, or 21% of total costs, to registries in 2020.  How this cost increase plays out through GDDY’s P&L is something to watch and monitor.

As of today, a .com name can be purchased from GDDY for $11.99 for the first year and $18.99 for years after that.  This pricing is competitive with Network Solutions, but there are definitely cheaper alternatives out there.  GDDY has maintained share in recent periods despite value alternatives, which may speak to its name recognition.

Despite the flat pricing environment and low single digit unit growth, GDDY has grown sales per domain under management from $13.45 in 2017 to $18.67 in 2020.  Though domain sales and renewals are a key component of the domains business, also included in this segment are aftermarket sales and domain add-ons like privacy and protection.

After-market services is a growing business, management disclosed this segment to be 10% of total revenues and listings surpassing 20 million domains.

Hosting is also a commodity service.  GoDaddy offers many flavors, but it can run $100- $300 p.a.

Customer Acquisition and Website Builder-

The interesting angle for GoDaddy is its ability to upsell domain and hosting customers to use GoDaddy’s website building tool.   GoDaddy’s website building tool is called Websites + Marketing, which is the current iteration of Go Central (launched in 2017 and itself was a redesigned version of a prior tool).  This business segment competes with Wix, Squarespace, Shopify and others.   W+M has a free version, then other tiers ranging from $80- $210 / year.

In addition to W+M, GoDaddy has a managed WordPress tool for users as well.  WordPress has been gaining material share from custom HTML, and GoDaddy is the largest host of WordPress sites (10% of all WordPress sites). 

Taken together W+M and Managed WordPress have 2.2 million subscribers and generate $350 million in ARR as of Q3 2020.  On the Q3 call, management stated ARR was growing 40%.  This ARR and sub figure points to a $160 ARPU. 

I think that this business can approach $750 million in ARR by 2025 mainly due to unit growth.  This will have a positive impact on margins.

GoDaddy has the least impressive website builder, but, I think their ability to convert domain only customers to CMS customers should give them a foothold in the market.  Also - I think their tool will less impressive is likely suitable for most users.  Depiste its inferior offering GDDY is the second largest CMS provider.

Valuation & Outlook –

GDDY has been able to grow top line double digits in recent years, with relatively even growth across segments.  The most significant changes impacting the outlook going forward will be the rate change from VRSN and growth in W+M.  From a margin perspective, EBITDA margin should expand through marginal expansion of gross margin (due to higher W+M mix), and leverage in customer care and G&A.  Given this I think FCF can surpass $1 billion by FY 2025.  Importantly, this includes approx. $200 million of cash from higher deferred revenue, so the business needs to keep growing to hit this figure, otherwise deferred revenue will stall.  Lastly, the company doesn’t expect to be a cash tax payer until 2027.  Due to the corporate structure (GDDY is an up-C), past LLC unit conversions and future conversions provide a tax shield.  If corporate taxes were to go to 28%, this shield will increase in value by >$4.00.  In sum, with this fundamental outlook, I think $8.00 per share in FCF in 2025 is a reasonable possibility, which should provide for a mid-to-high-teens IRR.

Catalyst

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