GoDaddy: Is further revaluation possible? (NYSE:GDDY)

Introduction

A few days ago I analyzed the Invesco S&P MidCap Momentum ETF (XMMO) and one of its holdings caught my attention given the higher EPS growth and relatively low valuation (PEG) . So, I decided to take a closer look at GoDaddy (NYSE:GDDY), the website builder and domain company transforming into an AI-powered e-commerce or digital platform.

What is GoDaddy

Sure, it’s a fun name and the company’s roots are based on domain registration and website hosting, then expanding into website building and now providing digital commerce services on the Shopify (SHOP) model, but perhaps with a broader focus on professional services. Currently, the company has 21 million users generating $206 per year, which is recurring revenue. Growth comes from adding new customers and increasing the number of customers. services billed per website. Core platform revenue is more mature with growth below 5%, while applications and commerce (A&C) is growing 13% and accelerating with the rollout of its AI feature called Aero. The AI ​​feature would add value through much faster, automated web design and functionality that also costs GDDY less and helps increase margins on already strong operating leverage. Below are some slides from the recent Investor Day which explain the company’s mission, strategy and core drivers.

Performance

GDDY went public in Q2 2015 and gained over 400% with a long period of stagnation between 2018 and 1Q24, as shown in the first chart. Shopify and Wix.com (WIX) have significantly outperformed, to the point where their price gains should be on the right axes for comparison purposes. Over the past 3 years, GDDY has been clearly outperforming Shopify and Wix, and with recent gains following the March 2024 Investor Day, where it provided details on the development of Aero AI.

Peer compositions

I have gathered consensus data to construct a comparative table to assess the growth and valuation of this sector. The companies offer similar services and compete with digital entrepreneurs of different sizes. GDDY has lower revenue growth estimates with better margins and a reduced valuation compared to many peers. However, the consensus upside is only 2% by the end of 2024 and may require analyst upgrades.

Consensus Estimates

The following table is a financial summary of key metrics along with consensus forecasts for GDDY. The market became increasingly positive in terms of growth, margins and cash flow after the Investor Day when it showcased its AI tools that can accelerate user interaction and ARPU as well as the global addressable market as a more full-service e-commerce or digital platform. like Shopify. Consensus EBITDA growth has increased to 10% and cash flow has exceeded 20% over the next three years, with a decline in 2025. It is likely that if GDDY’s AI tools experience this much success as the initial reaction suggests, the market Growth and price targets must be revised upwards.

Cash flow

Management met this free cash flow target, growing 20%, as shown in the chart provided at the recent investor day.

GDDY is not a high revenue growth company with a revenue CAGR of less than 8% over 2018-2023. It has instead focused on generating free cash flow, as shown by the FCF margin which increased from 18% in 2023 to 29% during 2023. YE18. This allowed it to initiate and increase share buybacks up to 30% of revenue in 2023, and I estimate that GDDY can continue share buybacks at 25% of revenue or 5% of the current market capitalization.

The company, like many others in the technology sector, uses stock-based compensation to reward and retain talent that comes through the income stream and is largely a non-monetary element that impacts on GAAP EPS. Cash profits are therefore a better indicator of growth and profitability. . New shares issued in a stock-based composition are significantly lower than shares repurchased.

Assessment

The market has a price target of US$140 for YE24, which doesn’t leave much upside potential. However, this is due to a very recent rise in the stock price following Investor Day in March 2024, which may have caught many analysts off guard. Based on consensus results, the current price target has an implied cash PE of 22x and a PEG of 0.7x (PE/EPS growth), which in my opinion indicates a relatively cheap valuation.

For the YE25 price target, I increased the PEG ratio to 1x on YE25-26 growth, leading to a fair PE at 30x and a price target of US$189. I think it’s possible that GDDY will continue to reassess its value given its accelerated growth, cash generation, and share repurchases.

The main risk of a further revaluation lies in the implementation of AL tools, which are expected to have a notable impact on margins this year.

Conclusion

I consider GDDY to be an expectation. The stock has largely priced in an increase in expected growth and cash flow from the recent deployment of its AI tools. While there is room to expand multiples further, the company may need to achieve that growth first before continuing its valuation gains, in my opinion.