Description

SimilarWeb (SMWB) was founded in 2007 in Israel by Or Offer, Benjamin Seror, and Nir Cohen and is the leading SaaS digital intelligence provider globally.  SMWB's platform provides data on over 100 million different websites and mobile applications, enabling its users to measure internal performance, perform competitive analysis, monitor market trends, and aid in sales and marketing.  SMWB went public in May of 2021 and today has more than $190 million in ARR with a Net Revenue Retention (NRR) of 115%.  Despite strong performance since coming public, the stock today has an EV under $500 million and trades at less than 2.5x 2022 full-year sales.  With only 3,849 customers, SMWB is still in the early stages of growth and is spending heavily on its product and sales efforts.  We believe the company will generate positive free cash flow (net of stock comp) in 2025, and it has plenty of liquidity to get to that point.  If we’re right about that, we think the stock will compound well over 20% for many years.  

Business Overview

SMWB's revenue comes from annual or multi-year subscription fees across five main product offerings: Digital Research Intelligence, Digital Marketing Intelligence, Shopper Intelligence, Sales Intelligence, and Investor Intelligence.  SWMB primarily targets the enterprise and has been shifting its business towards larger customers, with ARR from customers over $100k expanding from 37% in 2Q17 to 53% in 2Q22.  It has grown from $50 million in ARR in 2018 to $190 million across 3,849 customers as of 2Q22 while expanding to 115% NRR.  In clients with ARR over $100k, NRR has reached 127%.  The company also recently signed the largest contract in company history at over $6.5 million annually.  While $6.5 million annually is a significant contract, we believe there is room for larger contracts as the company continues to cross/upsell its products.  For reference, per the CFO of SimilarWeb, Procter & Gamble reportedly pays Nielson $100 million for its insights.  While these are somewhat different from what SMWB provides, it goes to show the immense appetite for actionable data.

SMWB also has a proven land and expand strategy with ARR for the top 50 customers expanding by an average of 12x from the first date of service, and 80% of customers are using two or more solutions today.  SWMB utilizes what one former employee referred to as the "Trojan Horse" strategy.  It enters one segment with the basic package and quickly spreads to other business areas such as marketing, business development, etc.

Shopper Intelligence is the newest major launch and has been the fastest and strongest launch of all the products.  Shopper Intelligence gives insights into the browsing and purchasing behavior of Walmart, Amazon, Chewy, Target, and Best Buy customers and covers 78% of all sales volume of the top 10 online stores in the US.  It took four years to reach a contract with over $1 million in ARR when launching the digital marketing and digital research products, yet shopper intelligence signed a seven-figure annual contract three months after launching.  Currently, SMWB prices the full product starting at $250k annually, but customers can also buy smaller, less expensive modules that offer more narrow insights.  In addition to the boost to ARR, shopper intelligence is also accretive to gross margin.  SMWB can leverage and repackage a large portion of its existing data when selling the solution, helping to lever its data costs.  As SMWB continues to grow its current product offerings and likely introduces new offerings, it should continue to drive gross margin leverage, pushing the consolidated gross margin above 80%.

While SMWB is spending heavily on growth, we estimate that every dollar of growth S&M spend currently results in a ~4x return and should expand from there as the company levers its S&M spend.  This is due to the NRR of 115%, low churn (not-disclosed, but "world-class" per the company), and multi-year contracts (36% of total).

Data Practices

SMWB takes in over two terabytes of data daily that it feeds into its algorithm.  It collects its data through 4 sources:

1)       First-party direct measurement data from websites and mobile apps, which the owners of the website/app choose to share directly with SimilarWeb.

2)       Contributory networks that consist of a collection of consumer products that aggregate anonymous device behavioral data, such as browser extensions. 

3)       Partnerships with companies like ISPs or measurement companies that provide SMWB with additional data they collect.

4)       Public data scraping from hundreds of millions of websites and apps.

SMWB does not rely on or use cookies, is GDPR/CCPA compliant, and has built robust systems to ensure that it does not analyze any personally identifiable information (PII).  Another key differentiator for SMWB is that it analyzes anonymized usage data and not user data.  Regulations around data will always be a risk for companies like SMWB.  However, the type of data and how the data is collected/analyzed carries a lower risk profile than companies with specific user data.

One area of focus for SMWB recently has been on App data.  It acquired Embee Mobile in 4Q21 and signed a significant data partnership with App Annie in early 2022.  This acquisition and partnership allow SMWB to enrich its App product, and it has since rolled out a new standalone App Intelligence module, which is still in the early stages of ramping.  While the exact terms have not been announced, SMWB pays a flat upfront fee to App Annie, which has temporarily hurt margins as the new product rolls out.

Management and Culture

SMWB is run by CEO and founder Or Offer.  Offer and co-founders started the business in 2007 while trying to do competitive research for his family business.  Since its founding, Offer has been at the helm and has grown the business from a free browser plug-in used to rank traffic to the leading digital intelligence company with a full suite of products.  When speaking former employees, they called the leadership at SMWB "world-class," with a "fantastic" culture and a company that "wouldn't be doing anything that was underhanded.”  Another said that "data privacy was one of the most, if not the most, important things.”

Long-term Potential

SMWB points to a bottoms-up analysis of a $34 billion addressable market.  To arrive at this figure, it takes the 850,000 companies with more than 100 employees it believes currently would benefit from the platform and multiplies it by the $40k ARPU at the time of the IPO.  I’m sure that’s wrong, but the pool of potential users is big.  As one former employee put it, "any company that cares about its digital presence should use SimilarWeb if they can afford it." Further, it has a robust pipeline of over 20 million free users that generate thousands of leads to the company.  SMWB is still in the very early stages of its journey, allowing for an attractive opportunity as the clear market leader in the space.

Competitive Advantages

Brand:

SMWB is widely known as the go-to company for web traffic data analysis both in the business and financial sectors.  It has the deepest and broadest data set, allowing for more accurate information than competitors.  Its brand is so strong that companies will give SMWB its internal web data for free to improve the quality of the data/product.  Additionally, SMWB is the data provider to some of the largest companies in the world, like Google, Amazon, and Walmart, and is used by governmental agencies like the Federal Trade Commission (FTC).

Network Effects:

Many paying and non-paying customers give SMWB their verified internal web data for free, which improves the quality of the models and the data that SMWB can provide.  Customers give their data to SMWB for several reasons: 1) Given the brand and reach of SMWB's platform, some companies do not want their traffic misrepresented by users; 2) Companies want to use the platform to display their actual digital reach 3) Companies want to be able to see their actual data in the platform when they compare it against the market, instead of SMWB's estimates 4) Companies see the benefit of more accurate data, so they give the data to be able to receive a better model output from SMWB.  All of this data is anonymized in SMWB's models, and it operates on an opt-in/out model as to whether companies' verified data is displayed externally for other users to see.  The more websites that provide data to SMWB, the better the product customers can receive, which allows them to make better decisions.

Switching Costs:

Larger clients will have SWMB data across multiple segments, allowing for apples-to-apples data conversations, making it harder for any segment to move away from SMWB due to data homogeneity.  If larger clients did want to switch, there are no suitable alternatives in the market that can provide the same level of data or a full suite of products like SMWB.  For smaller clients that utilize the base offering, switching costs are not as painful as the use case is typically more limited.

Cornered Resource:

SWMB has a very deep and broad set of data that stretches back for multiple years across 190 countries.  While competitors can buy similar data panels or access similar data, they will not have the depth of historical data that SMWB has running in its database or as many countries.  This creates a data moat when assessing the likelihood of a well-funded competitor entering the market.

Competition:

SEMrush is the closest competitor.  However, it focuses on smaller micro and SMB clients with smaller contract sizes and limited use cases.  SEMrush also focuses most of its data collection efforts on search engine scraping vs. direct/data panels like SMWB.  This leads to its product being more Search Engine Optimization focused than SMWB, although SMWB’s recent acquisition of Rank Ranger gives it a larger presence in the SEO space.

In the investment vertical, other data providers offer different data solutions like Second Measure (acquired by Bloomberg), which supplies credit card transaction data for the US, and Yipit Data, which provides in-depth company research based on internal and 3rd party data sources.  It is common to use SimilarWeb and another of these data providers at the same time given their differences.  Other potential competitors have either gone out of business (Hitwise) or were part of a larger company that decided to shut the business line down, such as Amazon's Alexa, which is being shut down after 25 years of business.

Valuation and Return Potential

At a sub $500 million EV and trading at ~3x EV/gross profit, SMWB is trading at a trough multiple despite strong growth and a bright future.  It has a clean balance sheet with no debt and $94 million of cash as of 2Q22, plus an untapped $75 mm credit facility, which is enough to cover any losses from growth spending in the coming years.  Similarweb needs to show the market that it can become profitable over the next 2-3 years – we believe it will and that shareholders will be richly rewarded as a result.   

Risks:

·       Data collection regulations/limits in the future

·       Scaling S&M Spend

·       Tight Float

Catalyst

Continued growth and improving margins in the coming years