Company Description

GoDaddy Inc. (“GDDY”) operates the world's largest domain marketplace, where its customers can find the “digital real estate” matching their idea. GDDY provides website building, hosting and security tools to help customers easily construct and protect their online presence. As their customers grow, they provide applications and access to relevant third party products helping them connect to their customers, manage and grow their businesses and get found online.

Capital Structure & Relevant Financial Metrics

Recent History & Investment Thesis

§  GDDY is the global market leader in domain name registration with over 21% of the 335 million worldwide domain names under management

-    Being the leader allows GDDY to have low customer acquisition costs, high retention rates and ability to sell additional products

§  GDDY has multiple ways of growing revenue and is expected to grow over 10% for the next 5 years

-    GDDY is expected to grow both the number of customers on its platform as well as the upsell of products to its current customers

-    Additionally, there are many acquisition opportunities to increase both customers and products

-    Currently, GDDY has over 17 million customers and has been adding close to 1 million net new customers a year

§  GDDY leverages its dominance in domain name registration to sell other products

-    As a result, of the domain business, their customer acquisition costs are much lower than competitors in for website development and hosting

-    GDDY has been upselling services to its domain customers which has resulted in a consistent increase in ARPU

§  Website customization is a fast-growing business.  While competitors like Wix.com have been growing faster, GDDY has been investing heavily in these products and offers competitive applications.  Their name recognition and low customer acquisition costs should allow them to catch up in the growth of this business

§  When customers sign up with GDDY, they pay for a good portion of their bill upfront, resulting in positive cash carry for GDDY and allowing them to fund their business with working capital

-    Their large market share in their domain name business allows them to maintain a significant competitive edge and prevent others from entering the business

-    In the short term, the $200+ million of positive carry will allow GDDY to pay down their debt at a faster rate than the market expects

§  GDDY has over $900 million in NOL’s which should shield them from taxes for many years

§  In April 2017 GDDY completed its acquisition of Host Europe Holdings Limited (“HEG”) for €1.7 billion

-    Added 1.6 million customers

-    Helped GDDY continue to diversify away from US, with now over 40% of customers are international

-    Merger will enable the rapid deployment of a broader range of products to customers and allow for better scale of product development

-    Acquisition was fully financed with cash and debt

-    Closed sale of PlusServer in August and used proceeds to pay down bridge loan

§  In September, the GDDY sponsors (including KKR & Silver Lake) offered shares in a secondary offering at $44 a share

-    Subsequent to the offering the Sponsor group ownership dropped from 45.5% to approximately 33%

-    Ownership by the sponsors has been an overhang on the shares of GDDY

§  In November 2017, GDDY repriced its Term Loan saving them approximately $6.5 million a year

Valuation

§  Curently, GDDY trades at a discount to comps.  Considering its recurring revenue business, market leadership and consistent growth profile I believe that GDDY should trade at a premium. 

§  I believe in a year, when investors start focusing on 2019 numbers, GDDY should trade at $65 which is 20x 2019 free cash flow or 15x the free cash flow when including the changes in working capital

Why Does This Opportunity Exist?

§  High leverage which was mostly raised to pay for an acquisition

-    Since capital costs are very low and the high amount of free cash low (especially due to the positive working capital) the relatively high Debt / EBITDA should not be an issue and the company should be able to pay down the majority of their debt balance with cash in just a few years

§  Investor nervousness surrounding the competitive environment including the success of Wix.com and Web.com

-    Recent execution on low customer acquisition costs relative to competitors has caused this anxiety to wane

§  Slowing of new customers in the US

-    The net new customers that they have been adding in the US has been slowing, mostly due to the maturing of the US market (it is still a fast growing market but at a slower rate).  The acquisition of HEG opens up the European market for them and customer growth should accelerate in the upcoming quarters

§  Sponsor Ownership a overhang

-    Sponsors recently sold some more of their position and are expected to continue selling, but now are at a manageable size

Risks

§  Continue slowing of their customer growth

§  Better execution from competitors

§  Mergers and Acquisitions

§  Continued paydown of debt

§  Announcement for Dividend / Share repurchase

§  Continued solid execution

§  Further sales by private equity sponsors