Description

Business Description:

GoDaddy is the global leader for solutions that enable web presence and digital customer interaction for microbusinesses and web pros (most commonly, independent professionals who build web presence solutions for small businesses).  The company’s solutions include domains (they are the global #1 registrar with ~25% market share), hosting, security, email, website building (both CMS and managed WordPress solutions), and commerce / payments.

In 2022 the company generated $4.1b in revenues, up 7% YoY and 8% in constant currency.  31% of revenue was from the Applications & Commerce segment, which grew 13% YoY and includes the company’s website building and commerce / payments solutions.  The remaining 69% of revenue was from the Core Platform segment, which grew 5% YoY and includes the company’s domains, hosting and security solutions.  The company generated >$1b of EBITDA (25% margin), $1.1b in unlevered FCF, and $1b in levered FCF ($6.20 per share).

GoDaddy’s stock trades at $69.65 and the company has 156.6m shares outstanding, giving it a market cap of $10.9b.  The business has $3b of net debt, representing 2.7x net leverage and giving it an enterprise value of $13.9b.

To summarize:

• GoDaddy is a market-leading, largely recurring revenue (mainly subscription, with 85% retention rates) business with an unparalleled and expanding solution set
• The business is growing (and showed accelerating growth in 1Q23 on both revenue and bookings)
• EBITDA margins are ~25% and expanding
• Leverage is low and declining
• Management is buying back ~10% of their shares per year
• The company is trading at a >9% levered FCF yield and a >8.5% unlevered FCF yield

Business Quality & Competitive Advantages:

GoDaddy’s financials are impressive.  In 2022 the company generated an unlevered FCF margin of 27%.  There is very little capital necessary to run GoDaddy’s business, primarily because of the company’s largely subscription nature which results in negative working capital.  The negative working capital actually outweighs the small amount of PP&E in the business.  Even when including the goodwill & intangibles from past acquisition, cash returns on capital are ~30%.

I believe that these attractive financial returns are a result of the following competitive advantages:

1. Brand recognition & customer satisfaction

GoDaddy has the highest brand recognition among its peers as a result of its scale; the company’s domain registrar market share is ~25% vs industry #2 at <10%.  This scale provides GoDaddy with the highest brand awareness of its peers (p.12 - https://s23.q4cdn.com/406380394/files/doc_presentations/2023/03/Q4-2022-GoDaddy-Overview-Feb-2023.pdf).  Not only is the company large and well-known, but it has very high customer satisfaction.  The company’s NPS score is 65 (“50 and above is excellent” - https://blog.hubspot.com/service/what-is-a-good-net-promoter-score), and the company’s website building tool is rated by Google Core Web Vitals as the highest performing website builder.

2. Large consumer surplus

GoDaddy provides a lot of value for their customers – often their entire web presence, marketing and communication tools and payments infrastructure.  In many cases, GoDaddy is essentially the technology backbone of a microbusiness.  Compared with that value proposition, GoDaddy’s ARPU is $197 – that is less than a typical weekly grocery budget for a family of four.  As a result GoDaddy has nascent pricing power that they have been executing on over time with targeted price increases (most recent was last week, with 10-50% increases across different website builder subscription tiers).  Positively, the company’s pricing strategy in general is to increase price as they increase the customer value proposition (i.e. increase the price of a bundle, but add additional services to that bundle).  I believe this strategy is not only financially attractive but also sustainable and part of the reason why the company is able to sustain high NPS scores.

3. Product breadth / LTV:CAC vs competition

I believe that GoDaddy’s- business is often wrongly looked at in the vacuum of individual product lines.  For example, the domains business has been consistently derided as an intensely competitive business with limited competitive advantages.  Meanwhile, the website building business has been criticized relative to pure-plays like WIX or SQSP.  The reality is that GDDY has unparalleled product breadth relative to competitors in particular product / solution lines.  For example, one of the reasons that GoDaddy’s leading share in domains has sustained / increased over time, is that it is in the enviable position of a) having the scale to get more organic customers (per our conversations, the company says that half of their customers come in from organic channels) via higher brand awareness, and b) being able to outspend competitors because their attach rate of hosting / security / website building / marketing / email / payments / etc. results in an LTV that will deliver a higher ROI in spite of a higher CAC.  Payments is a great example of the company’s success in leveraging product breadth as a competitive advantage.  GoDaddy launched their own payments platform last year and has already grown it to >$1b of GPV.  The product is financially accretive to GoDaddy despite being the cheapest option available to customers.

4. Customer care organization
   GoDaddy’s large internal customer care organization is a unique competitive advantage relative to their competition.  Their ability to field this organization is a direct function of the company’s scale and product breadth.  Customer care is another “everybody wins” aspect of GoDaddy.  The well-trained “guides” delight customers and are essential to the company’s high NPS scores.  The care organization is a profit center – the organization has driven ~15% of bookings through product upsells, based on our conversations with management.  Lastly, “guides” are well incentivized and compensated – good ones make north of $200k/year, aligned through revenue and NPS targets.  One former employee noted that customer care is the “secret sauce” of GoDaddy, and that customers who call into customer care have NPS scores that are 50% higher than those who don’t, and churn rates that are lower.

Management:

GoDaddy is led by CEO Aman Bhutani.  Aman joined the company in September of 2019 and before that was President of the Expedia brand at EXPE.  At Expedia Aman was credited with executing on the very successful (from both a technical and financial perspective) integrations of the Orbitz and Travelocity acquisitions.  At GoDaddy Aman has significantly increased the velocity and productivity of the company’s product development.  Aman has improved and grown the Websites + Marketing product, and created a payments platform from scratch that is already generating >$1b in GPV.  Furthermore, Aman has accomplished this while expanding margins and buying back >10% of the company’s shares outstanding.  From our interactions with employees and former employees, he is also a widely admired and beloved leader.  Prior to Aman joining, our research had consistently produced the feedback that GoDaddy was excellent at marketing and bundling / taking advantage of their product breadth.  The most exciting thing about Aman is that he compliments that strength by increasing the company’s technical prowess.  We believe that Ama’s impact on the company’s technology and product development is already clear in the success of the company’s website building solutions and the introduction and early success of the company’s commerce / payments solutions.

GoDaddy’s CFO is Mark McCaffrey.  Mark joined the business in June 2021 after a 20yr career at PWC where he most recently ran the TMT group.  Our understanding is that Mark Garrett, a GoDaddy board member and highly respected former CFO of Adobe, was instrumental in Mark’s recruitment to GoDaddy.  At GoDaddy Mark has presided over steady execution towards clear financial goals (+10% revenue growth, +15% EBITDA growth, and +20% FCFPS growth) with an explicit capital allocation program ($3b of share repurchases over three years).

Growth Prospects & Earnings Power:

GoDaddy in general benefits from some macro / industry tailwinds; digitization of small / microbusinesses, the trend towards CMS and WordPress vs custom HTML sites (GoDaddy uniquely benefits from both its Websites + Marketing CMS solutions and its Managed WordPress solutions, and digitization of payments.

In terms of putting #s around these drivers, Verisign’s domain name growth is a good proxy for GoDaddy’s core / base.  Pre-COVID, Verisign’s names were growing 3-4% and they are forecasting a return to growth of 0.5-2.25% this year.  On top of that, GoDaddy is growing above market by offering both CMS and Managed WordPress solutions for the website building market.  The overall market is >40% custom HTML sites, ~1/3 WordPress sites, and the remaining ~25% CMS, with the latter two taking share from the more expensive and time-consuming custom HTML.  GoDaddy operates in both share-gaining categories.  GoDaddy’s website creation business is a top 3 player, along with Wix and Squarespace, and is gaining share at a similar rate; in Q4 (Wix and Squarepace have not yet reported 1Q23), GoDaddy’s Create & Grow ARR grew 8% YoY and 3.5% QoQ, Wix’s Creative Subscription ARR grew 7% YoY and 1% QoQ, and Squarespace’s Presence Revenue (they only report ARR that includes annualized transactional revenue) grew 10% YoY and 5% QoQ.  It is worth noting that Squarespace’s Q4 results benefited from a price increase that they rolled out in late 2022 and resulted in higher bookings and lower churn than expected.  I mention that a) to highlight the pricing power in these businesses given the low ticket price and high price / value, and b) because GoDaddy just rolled out a similar price increase.  Lastly, GoDaddy is growing on top of those aforementioned drivers as it introduces new solutions for its customers, most notably payments.  GoDaddy got into payments by acquiring the payfac (payments facilitator) Poynt in December 2020, integrating it into their product development, and then beginning to launch various pieces of their commerce offering about halfway through 2021.  At the time of the Poynt acquisition, GoDaddy targeted $150m of bookings in 2023 (would represent 400bps of revenue growth this year).  Since then the product launch has been very successful – GoDaddy Payments is the cheapest option presented to consumers, and has thus resulted in a very high attach rate (on the 4Q21 call the company noted that it was already 60%, on their 1Q22 call the company shared that the penetration had already grown to 70%, and then on the 2Q22 call they noted that penetration was now >80% - not too surprising a trajectory given that they can integrated it as well as any other option, present it attractively in the offer flow, and price it at a 25% discount to the next cheapest option).  The biggest opportunity for GoDaddy, given their 21m customer base, is pushing GoDaddy Payments into their existing base of merchants – on the 1Q23 call the company noted that this has been going better than expected and has been instrumental in growing their GPV to >$1b.

Last week GoDaddy reported an inline 1Q23 and reiterated their 2023 financial guidance that was initially provided on the 4Q22 earnings call.  In 1Q23 revenue and bookings both accelerated from Q4, bookings grew faster than revenue (which is impressive given the quickly growing payments platform which is transactional and thus has bookings that are immediately recognized as revenue), and according to Aman on the conference call gross adds accelerated throughout the quarter.  Given that momentum, the rolling off of their FX impact and their strong aftermarket performance last year, as well as their recent $100m restructuring plan, management believes they have a clear line of sight to exiting the year at 7% topline growth and 28% EBITDA margins.  I believe that accelerating revenue growth and expanding margin profile, not to mention shrinking share count, will result in ~$6.40 per share in FCF this year and ~$7.50 per share next year.

Valuation:

GoDaddy’s implied guidance is for >$6.40 per share in FCF (+$1b in levered FCF and a share count of 156.6m and declining).  The company is an industry leader with excellent returns on capital.  The business is largely recurring, growing, and on a path to accelerate towards double-digit top-line growth.  Operating leverage should translate into 15% or better profit growth, and share repurchases should translate into 20% or better FCFPS growth.  Leverage is low and declining, the market cap is >$10b and the stock is trades >$70m/day on average.  Furthermore, management has proven strategically, operationally and financially adept.  I believe that a business with these characteristics deserves to trade at least at a market multiple.  15x $6.40 in FCFPS equates to a $96 share price, representing nearly 40% upside (followed by ~20% growth in FCFPS).  My bull case is 18x a 2024 FCFPS # of $7.50, resulting in $135 per share, or nearly 100% upside.  My bear case is 8-10x a sub $6 FCFPS # which would result in ~25% downside.

Opportunity & Timing:

Like many other Internet business, GoDaddy has been navigating its own COVID hangover, with bookings slowing materially in 2022 after a strong COVID-charged 2020 and 2021.  As a sanity check re: whether GoDaddy’s fundamentals have been due to the broader environment or something more sinister (share loss, disruption, etc.), I think it’s useful to look at Verisign’s results (for a good visual, p.5 - https://investor.verisign.com/static-files/d89a8569-69d1-4ec2-ad89-55bcbdb9626a) to see that they had four quarters of sequentially declining domain names and just reported a return to growth in 1Q23.  Wix and Squarespace have had similar trajectories.  While GoDaddy’s stock de-rated as a result of the slowing bookings growth, management took the opportunity to implement a $3b share repurchase authorization and has retired >10% of shares outstanding.  They also have expanded margins and announced an additional $100m restructuring program last quarter.  Q1 finally showed a reacceleration in gross adds (per commentary), bookings and revenue.  With the payments business gaining steam, bookings growing faster than revenue, gross adds improving throughout Q1, and comps improving, it looks probable that fundamentals have bottomed and inflected positively.

Other:

GoDaddy has an activist shareholder – Starboard Value.  GoDaddy is Starboard’s largest position, they added to the position in the most recent quarter, I believe that the relationship between the two firms is constructive, and I believe that Starboard’s cost basis per share is slightly higher than where the shares trade today.

Risks:

AI – I believe that AI is more of an opportunity than a risk to GoDaddy, but given that the stock has gotten whacked when companies like WIX and SQSP have been shorted via “AI risk baskets” created by brokers, I felt like I should mention the topic.  GoDaddy uses AI in its products today in order to make the experience easier for its customers, it is working on more use cases, and I personally believe that AI is very likely a significant revenue and cost opportunity within the care organization.

Deferred revenue – given the subscription nature of the business, FCF is levered to growth via deferred revenue, so if growth were to slow or reverse, FCF would be impacted accordingly.  On a positive note, bookings growth accelerated during 1Q and grew faster than revenue, and Aman noted that gross adds increased throughout the quarter.

SBC – it is materially better than other tech companies, but GoDaddy has still had SBC as a % of revenue anywhere between 2.5-6.5% of revenue over the years.  We try to take this into account by growing the share count accordingly on a gross basis, and then factoring in our estimate of future share repurchases.  Encouragingly, over the past few years the company has seen a material net decrease in its number of shares outstanding.

Catalyst

Share repurchases

Earnings

GPV growth