#017 - GoDaddy

GoDaddy provides domain registration services, content management software, and business application products. It has healthy free cash flow margins with some interesting growth opportunities.

GoDaddy - (NYSE: GDDY)

GoDaddy provides domain registration services, content management software, and business application products. It has healthy free cash flow margins with some interesting growth opportunities.

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Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.


Industry Overview

GoDaddy has three main business lines that are all connected to the web infrastructure/online commerce industry. GoDaddy mainly competes with other companies that provide domain registration services, content management software (basically helping customers organize and make a website), and other tools to build an online business/website.

GoDaddy’s main business lines span across multiple industries and therefore gives GoDaddy a list of competitors, most notably Wix, Shopify, Verisign, with plenty more that I haven’t named.

This industry will likely continue to expand over the long-term as more business activity moves online and the need for not only a domain but tools like SEO, hosting, help with e-commerce tools, and professional websites become more important for businesses and individuals.

Business Overview

GoDaddy has three main business lines:

  • Domains

  • Hosting and Presence

  • Business Applications

I think breaking down these product lines helps me to understand what GoDaddy does and how it makes money. For example, at the very basic level, GoDaddy helps customers find and buy domains. GoDaddy charges a subscription fee for this service. GoDaddy is the leading domain name registrar.

GoDaddy is in the lead “position with 22% of all domains under management.”

- Andrew Low Ah Kee (former GoDaddy COO) Analyst/Investor Day - April 2020

GoDaddy’s domain registrar business is the same size as the closest 10 competitors.

Then the hosting and presence business line is another product to help customers build an online presence for their business, blog, or whatever their website is for.

Business application revenue includes revenue generated from selling Microsoft Office 365, email accounts, email marketing, and a handful of other services. Customers who decide to purchase products in the Business Applications category are a more dedicated and engaged group of customers.

Total Addressable Market

GoDaddy also separates the total addressable market into three different categories:

  • Dream

  • Create

  • Grow

“Dream” represents GoDaddy’s domain offering. GoDaddy believes the average customer spends $15 per year which leads to a TAM of ~$5bn.

“Create” represents GoDaddy’s products that center around a customer’s email and website. With an average customer spend of $100 - $250, this gives GoDaddy a TAM of ~ $45bn in this segment of the market.

“Grow” represents GoDaddy’s highest-end offerings. These products are meant to be for the most serious customers and include marketing, commerce, and consumer engagement. These customers spend between $600 and $1,000 which gives this product segment a TAM of $130bn.

Adding all these segments up gives GoDaddy a total addressable market of ~$180bn. Now obviously, in today’s market, management teams tout going after a massive growing market, but it’s warranted for GoDaddy. GoDaddy is looking to monetize internet activity and online commerce. These two markets are massive markets and even if GoDaddy captures a small sliver of each market, GoDaddy will be a large business. Online commerce has been a major focus for the management team and has been talked about on recent earnings calls and presentations. Helping entrepreneurs and small businesses create an online store or reach customers digitally is a massive market with many competitors. Just look at what Shopify has become. Shopify has ridden this trend up until now and will likely continue to be a leading company in the space. GoDaddy is looking to jump on and ride this trend as well.

Competitive Advantages

  • Brand…?

    Management has stressed that GoDaddy’s competitive advantage its brand.

    “With an understanding of our customers' journey, let's take a moment and talk about GoDaddy's competitive advantages. It all starts with our amazing brand.”

    - Amanpal Bhutani (Current GoDaddy CEO)

    While although GoDaddy has a strong brand as consumers may think of GoDaddy first when registering a domain name, I question GoDaddy’s brand when it comes to starting an online store. I’d argue that Shopify has a better brand name for most consumers when it comes to starting an online store. I’m not sure how strong GoDaddy’s brand is. I feel like everyone has heard of GoDaddy but many might not know what the company does.

    I’m not so bullish on GoDaddy’s competitive advantage and feel like there could be something I’m missing and as I’m working through shallow dives on other companies, I might come across something insightful that might change my mind. But from what I’ve read and thought about, it seems like GoDaddy doesn’t have nearly as strong of a moat as Shopify or Wix.

Financials

GoDaddy is one of the few tech companies that isn’t absurdly overvalued yet also doesn’t have negative revenue growth. GoDaddy has a healthy and growing FCF margin and some interesting opportunities with commerce that could make GoDaddy’s stock explode. Gross profit will likely stay constant but there’s room for more operating leverage in the business which will make the FCF margin expand over time.

2020

  • Domain revenue = ~ 1,515 million

  • Hosting and presence revenue = ~ 1,201 million

  • Business applications revenue = ~ 601 million

  • Gross profit = ~ 2,158 million

  • GAAP EBIT = ~ 272 million

  • Free Cash Flow (FCF) = ~ 825 million

  • Customers = ~ 20,646 million

  • Average revenue per customer = ~ $160.65

  • Domain revenue growth = ~ 12.1%

  • Hosting and presence revenue growth = ~ 6.6%

  • Business applications revenue growth = ~ 17.8%

  • Gross profit margin = ~ 65.1%

  • GAAP EBIT margin = ~ 8.2%

  • FCF margin = ~ 24.9%

2019

  • Domain revenue = ~ 1,352 million

  • Hosting and presence revenue = ~ 1,127 million

  • Business applications revenue = ~ 510 million

  • Gross profit = ~ 1,961 million

  • GAAP EBIT = ~ 203 million

  • Free Cash Flow (FCF) = ~ 736 million

  • Customers = ~ 19,274 million

  • Average revenue per customer = ~ $155.04

  • Domain revenue growth = ~ 10.8%

  • Hosting and presence revenue growth = ~ 10.7%

  • Business applications revenue growth = ~ 20.8%

  • Gross profit margin = ~ 65.6%

  • GAAP EBIT margin = ~ 6.8%

  • FCF margin = ~ 24.6%

2018

  • Domain revenue = ~ 1,220 million

  • Hosting and presence revenue = ~ 1,018 million

  • Business applications revenue = ~ 422 million

  • Gross profit = ~ 1,766 million

  • GAAP EBIT = ~ 150 million

  • Free Cash Flow (FCF) = ~ 620 million

  • Customers = ~ 18,518 million

  • Average revenue per customer = ~ $143.65

  • Domain revenue growth = ~ 15.4%

  • Hosting and presence revenue growth = ~ 20.0%

  • Business applications revenue growth = ~ 29.2%

  • Gross profit margin = ~ 66.4%

  • GAAP EBIT margin = ~ 5.6%

  • FCF margin = ~ 23.3%

What’s Interesting

  • Napkin Math Valuation

    GoDaddy’s management team has a goal to do $4bn in revenue and $1.1bn in FCF in 2022. Assuming GoDaddy can reach these numbers and continue to grow at high-single digits, the valuation seems rather fair and attractive.

    Assuming GoDaddy has a market cap of ~$12bn + $4bn in debt, for an enterprise value of ~$16bn. Management is targeting $945 million in free cash flow in 2021. This is a free cash flow yield of ~5.9% for a company that can likely grow free cash flow low double digits over the next handful of years.

    I have two concerns with this though. I wouldn’t want to bet on multiple rerating/improving FCF yield which would increase forward returns. I’m still concerned about GoDaddy’s competitive advantage and would therefore stay away from this business until I learned more about some possible competitive advantages.

  • Commerce

    Commerce is a massive market. I truly think that Shopify has won the bulk of the physical e-commerce product market so I think GoDaddy will struggle to compete. If GoDaddy is successful in capturing just a small share of this market, it could have a large impact. E-commerce is also a hot industry right now so winning in this space would also help with future returns. If GoDaddy had one piece of optionality in the business, online commerce would be the answer.

Future Questions

  • Competition

    I think the biggest and most obvious risk for GoDaddy is competition. I don’t think GoDaddy will even come close to Shopify for physical commerce. Sure, GoDaddy may have some success upselling small businesses to premium offerings for e-commerce and this may or may not make a big enough impact on its financial results, but what about the headstart that Shopify has against GoDaddy? Shopify is trying to compete with Amazon, how the hell is GoDaddy going to compete with Shopify.

    I haven’t even touched on the other business lines. Google has a better brand and what happens if people just turn to Google to manage domains and serve as the primary domain registrar? The bulk of GoDaddy’s revenue comes from domain-related revenue. There are also many other companies and websites where I can go and register a domain name instead of GoDaddy. It seems to be what company has the easiest product to use and the cheapest price from my point of view.

Conclusion

I’d love to be proved wrong about my thoughts on GoDaddy so if anyone has anything to share please do. I follow a list of investment managers and there are a handful of them who own GoDaddy so I’m sure there’s a case to be made for owning this stock.


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