Description

Similarweb (NYSE:SMWB) | $7.81 per Share

$625m Market Cap | $558m Enterprise Value FYE24 Projected | $1.5m ADV | $27.17 PT in 2030 (248% Upside)

Investment Thesis:

• Similarweb sells software that offers differentiated insights on web and app data to enterprise and SMB customers. As a thinly traded company based in Israel, we believe investors have not paid enough attention to the opportunity set in the common equity. Similarweb is the industry-leader in combined web and app traffic data across the world and serves a valuable niche without much competition.
• Similarweb went public in May 2021 and was burning cash. In FY23, the company drastically managed its P&L and inflected to positive Adj EBITDA despite a difficult year in the enterprise and SMB software market. Similarweb is a prime example of a software business that “got fit” to adjust to the market’s expectations for profitable growth. We believe investors are dramatically underestimating the earnings trajectory of the company and shares are well below intrinsic value. We think that Similarweb could attract growth and value investors alike given its attractive earnings and growth story.
• From $8 per share, we project nearly 100% upside over 3 years and nearly 250% upside over 6 years. These PTs reflect ~5% FCF yields on our FCF/share estimates and mid-teens Adj EBITDA multiples for the projected enterprise value by year, inclusive of cash generated. For a pure recurring revenue business that should grow revenue organically at 11-14% between now and 2030 and compound FCF/share at a 25%+ CAGR over the same period, we believe this is a plausible valuation outcome. Therefore, we present PTs of $15.26 in 2027 and $27.17 in 2030. Note that we assume that it takes longer to reach the long-term operating model goals than the company expects.
• Additionally, Similarweb has a robust net cash position and should end the year with ~67m of net cash. The company generates free cash flow and does not depend on the equity or debt markets to finance its long-term growth. We think a fast-growing niche software company with an overcapitalized balance sheet is highly compelling, particularly at these prices.
• We suspect that Similarweb would more likely be acquired by PE than it would be acquired by a strategic unless a strategic decided it needed access to the industry leader of this type of online data. There is value in Similarweb being independent from search engine providers, which means it would not be acquired by a large tech company in that space. The company is also too small to matter to those bigger players.

Business Model

• Similarweb collects, cleans, and analyzes billions of global data points across web and app traffic and uses its proprietary algorithms to synthesize detailed views of online activity for marketers and ad agencies seeking SEO and campaign optimization, corporations seeking competitive insights, investors seeking alternative data, sales teams seeking better lead conversion, and e-commerce sellers seeking more efficient sales channels. Similarweb has the most robust collection system of global traffic data and is the only 3^rd party player with sufficient network density in many geographies. Similarweb claims to have proprietary coverage of more than 2/3 of its data and also leverages widely available web and app data to feed its internal algorithms.
• Over time, Similarweb has been able to augment this data and package it into software products for specific industry verticals without much incremental investment in data collection. This provides a unique, mostly fixed COGS item in its data that can be used to spur accretive growth. As of Q1 2024, 58% of its revenue base was from clients with over $100k ARR, and 42% of its ARR was underpinned by multi-year contracts. NRR in the $100k+ ARR category stood at 107% and overall NRR stood at 98% as of Q1 2024. We believe we are towards the bottom of the NRR trends, and we expect NRR to step up in the next 18 months, which will support higher organic growth rates.
• Similarweb has been operating at the top of the industry for over a decade, and this is an industry where the leader tends to accrue more benefits over time as they scale into more data and more informed insights than competitors. Previous incumbents like Alexa Internet have shut down partly due to Similarweb’s dominance but also partly due to this still being a more niche industry that does not justify the large expenses required to enter or remain in the space if you do not have a proprietary data advantage.
• Similarweb primarily competes with SEMrush and Ahrefs in the SMB market and somewhat in the enterprise market, however both players are much more focused on the SMB market and frankly serve great niches in ways that Similarweb is not working to undermine. In the enterprise market, Similarweb mostly stands alone but faces sales barriers by some larger companies who have built their own systems to analyze traffic data (there are only 10-20 global companies that have sufficient data coverage to negate the need for a 3^rd party provider like Similarweb). We believe Similarweb has a long sales runway and is improving its product offering each year to bring in new customers and expand spending among existing customers.

Sources of Competitive Advantages

• Barriers to Entry – The costs to collect data tends to vary country-by-country and are expensive. It also takes 4-6 years to capture enough data to provide accurate insights because you have to capture a certain percentage of all traffic data before your samples can be extrapolated. Therefore, new competition is greatly dissuaded from entering the space. Similarweb has multi-year head starts over competitors and is continuing to expand its lead.
• Scaled Data Advantages – More data equals more accurate predictions and reflections of online and app activity. Therefore, the player with the most data presents the most compelling product for customers to purchase. Similarweb’s data has been tested and validated by 3^rd party researchers as the most accurate offering, which yields better sell through. Similarweb’s proprietary algorithms to clean, test, and extrapolate traffic data have been trained on a decade plus of activity, which results in more accurate results.
• Proprietary Data Sources – In addition to the above points on the company’s data collection, the majority of the data is from proprietary sources, which enhances the value of its product and deters competition.

Management Incentives / Insider Ownership

• The management team is mostly Israeli and seems broadly capable to execute on the company’s vision in our opinion. We believe they are fairly compensated and aligned with investors.
• Or Offer is the founder and CEO of the company and owns 6.7m shares, ~8.3%.

Key Investment Risks

• Failure to Grow Organically at DD Rates – We would consider any organic growth rate sub 10% to be a result of execution failure or a result of higher-than-expected churn, both of which would flag concerns for us and challenge the thesis. We believe that as Similarweb’s revenue mix of $100k+ ARR customers increases, the overall NRR will scale up and support growth. If we see material changes in NRR for clients of this category, it would challenge our growth rate assumptions.
• Venture Holders Overhang – 5 VC holders own about 57% of the company. This has been a major factor in the ADV of the shares and has been a limiting factor for larger funds that might want exposure to the equity. The VCs have largely not sold any shares since the IPO.. We think investors assess this as a big overhang risk, thinking that the VCs need to exit in a disorderly fashion. In our talks with the company and other experts, we believe the VCs are increasingly willing to line up secondaries at or around the $9-10 range per share. If they can sell some blocks to reduce their stakes, we believe this would be great for the equity. We have not identified any risks of any one VC firm that has a time-sensitive imperative to exit, as they all seem capable of holding onto shares for years given their mandates. However, should this not prove to be true, there could be pressure on the stock in the event of a disorderly sale.
• M&A Risk – Similarweb has stated that its primary focus is bolt-on data acquisitions; but if it should stray and seek a more “transformative” deal, it could harm the business. We assess this as a low risk but think it is worth noting.
• Failure to Expand Margins in Pursuit of New Products or Growth – Simiarweb has proven very rational in its investment spending in the last 18 months, and we do not foresee any material ramp ups in opex spending or product expansion. If the company changes gears on this, we would need to reevaluate our earnings trajectory.

Primary Research

• We have gathered survey responses from dozens of customers and spoken to several. We have also spoken to clients of competitive products or clients who are able to in-house this form of data collection. Overall, we have received very positive feedback. The key negative feedback has been that for customers who are not using Similarweb’s data to feed their own systems or directly inform marketing, sales, or other efforts, these customers would be able to churn off of Similarweb within 1-3 months if they decided to leave. SMB churn will always be higher than enterprise churn for this reason.

Financial Analysis

• As the business scales and larger customers become a bigger part of the revenue mix, the built-in growth before new customer additions will become 5-7% for the overall company. Layering on new customer wins, we believe this business can grow 12%+ for many years. As they scale, they have a relatively tight grip on opex expansion, which generates substantial operating leverage. The contribution margin from existing clients in their second year and beyond are very compelling, which supports earnings growth over time. Further, the gross margins have the potential to expand to the 85% range on a non-GAAP (adjusted for stock comp within COGS and some of the company’s amortization within COGS), which would be about 450bps higher than the current run-rate. Overall, the company is targeting 25% Adj EBIT margins, which equate to about 27.5% or 28% Adj EBITDA margins in the long-term operating model. We assume it takes the company until 2030 to reach these goals at revenue of $477m, but the company has said that the target revenue range for the long-term operating model would be between $400-$450m. The company has also stated a FCF Margin goal of 30% when they reach 25% Adj EBIT margins. We are 450bps below that FCF Margin target in 2030 given our assumptions on taxes and NWC might differ from the company’s internal Adj EBIT to FCF conversion bridge.
• When accounting for ~2% annual share count dilution, we arrive at FCF/share estimates of $0.76 and $1.36 in 2027 and 2030 respectively. Given the shares today trade just north of 10X 2027 FCF/share, we believe the shares are substantially mispriced. We believe the current share price of $7.81 equates to a FCF yield of 5.7% in 2025.

Catalyst

• VC holders reducing stakes, which increases float
• Continued execution on earnings expansion and revenue growth