#026 - Squarespace

Squarespace helps people and businesses make websites.

Squarespace - (NASDAQ: SQSP)

Squarespace helps people and businesses make a professional looking website without having to rely on a digital agency or designers. Squarespace competes primarily with Wix, Weebly, and Wordpress.

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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

Squarespace competes with other companies that help consumers and businesses make a website or build an online presence. These tasks include building a website, buying a domain name, and setting up a professional email. Many of the companies competing in this industry all offer similar if not identical services. My goal is to try and find out what are the primary differentiating factors that aren’t easily replicable by competitors and whether this leads to a sustainable competitive advantage.

Squarespace’s most notable competitors are Wix, Wordpress, and Weebly (owned by Square), and other competitors like GoDaddy, Shopify, Webflow, and others.

Nowadays having a website or an online presence is crucial to having success as a business and potentially even as an employee (showcasing your portfolio, resume, or a background about who you are). The internet is the first place people turn to find new restaurants, find a nearby company, or find out more information. Having a website is a fundamental need for all companies.

Squarespace makes it easy to build a website, but also offers the flexibility to build a more professional looking website. Many other competitors have a similar offering, making it easy to build an initial simple website while also giving you the flexibility to hire a designer to build a more professional website. Everyone needs a website, but there are so many businesses that help you create a website, so why would a company in this industry be a good investment?

Business Overview

Squarespace is a company that helps anyone make a website or an online presence as the company likes to call it. Squarespace has three primary business lines:

  • Presence

  • Commerce

  • Marketing

Squarespace only breaks out presence and commerce in its operating results. Presence is Squarespace’s traditional business line. Presence allows consumers to build a website, buy a domain, and build a social media following. Commerce enables consumers to sell physical products, subscriptions, content, and services online. Marketing gives customers marketing features like email campaigns, CRM functionality, SEO, and analytics tools.

Squarespace is led by its founder and CEO, Anthony Casalena, who founded this business in college and has grown it since. Anthony owns a huge stake in Squarespace and is likely well aligned with the future shareholder base.

Squarespace’s future potential probably lies within its commerce offering which has seen tremendous growth. Through commerce, Squarespace can also capture more revenue through subscription revenue but also collecting a take rate on the GMV processed through its platform.

Total Addressable Market

Squarespace competes in a large market. This is readily apparent with all the competitors in this industry like Shopify, Wix, GoDaddy, Wordpress, Webflow, and many others. There are even more companies that I haven’t heard of that help consumers and businesses make a website.

I think the concern for this industry is how much market share these companies can capture. There is plenty of room for these companies to grow. For example, the following is a quote from Squarespace’s S-1:

“We believe we have a significant existing and growing market opportunity with over 800 million small businesses and self-employed ventures globally.”

At the end of 2020, Squarespace had ~3.6 million unique subscriptions (its term for subscribers) which shows a penetration rate of 0.45%. I don’t think Squarespace (or any competitor for that matter) to capture a large market share in this industry, but it does show that there is plenty of room for reinvesting into this business.

Competitive Advantages

  • Switching costs

    If you’re using Squarespace or any of its competitors for a personal site or for a business website, chances are you’d be very hesitant to switch sites and redo the whole process of building a website and learning the tools from another website creator. If you’re a business owner, you want to focus on running your business, not fixing your website.

    To play devil’s advocate, business owners may be willing to pay a designer or someone else to redesign your website (do-it-for-me or “DIFM”) if the website is important for your business. What that leads me to believe is that what matters is what platform designers are most comfortable with. Designers face a learning curve with these platforms. They want to stick with the one or two tools they’re most comfortable and confident using.

    If these designers are more comfortable working with Squarespace, then they’d try to convince clients to switch to Squarespace. That leads me to the question, what platform has the most skilled designers?

  • Platform/Designer Marketplace

    Oftentimes these companies have a “marketplace” for various apps or services. Wix has an app market and a marketplace to connect designers, marketers, and web developers with website owners. Shopify has something similar via “Shopify App Store” and other competitors have very similar features to help consumers create their website. While I think this is an important feature, I worry that now that all of these companies offer a similar feature, that this isn’t a differentiating factor.

Financials

Squarespace only recently filed its S-1 and is not a publicly traded company. The company doesn’t disclose much financial info, but I wrote what I thought was some of the important metrics below. Squarespace has some strong growth in the commerce segment of its business (more than 77% growth in 2020, albeit on a relatively small base compared to the rest of the business and in a transformational year for online spending).

ARPUS = average total revenue per unique subscription. Management calculates this figure by taking the total revenue dividing it by the average number of subscriptions over the past two years. Management’s forecast for 2021 are to do $764 - $776 million in revenue with a unlevered cash flow of $100 - $115 million.

2020

  • Presence revenue = 477,831

  • Commerce revenue = 143,318

  • Total gross profit = 522,812

  • Unique subscriptions = 3,656

  • ARPUS = 170

  • GMV = 3,897,241

  • Gross profit margin = 84.2%

  • GAAP EBIT margin = 6.5%

  • Adjusted EBITDA margin = 18.8%

  • Unlevered free cash flow margin = 24.5%

  • Presence revenue growth = 18.2%

  • Commerce revenue growth = 77.8%

  • Commerce revenue / GMV = 3.7%

2019

  • Presence revenue = 404,156

  • Commerce revenue = 80,595

  • Total gross profit = 402,841

  • Unique subscriptions = 2,984

  • ARPUS = 162

  • GMV = 2,043,195

  • Gross profit margin = 83.1%

  • GAAP EBIT margin = 12.7%

  • Adjusted EBITDA margin = 20.1%

  • Unlevered free cash flow margin = 19.5%

  • Commerce revenue / GMV = 3.9%

What’s Interesting

  • Founder-led

    I love a founder-led business. Anthony Casalena founded this business from his college dorm and has built it into a multibillion dollar business. Just like plenty of other successful companies (Facebook, Amazon, Shopify, and many others) having a founder at the helm of the company allows many investors to sleep well at night, myself included. He’s only 38 and will likely continue to run this business for a number of years.

    While I still like to see a company with a strong sustainable competitive advantage, from this initial overview, I think the management team is less of a worry than other aspects of this business.

  • Commerce

    While I doubt that Squarespace will be able to compete with Shopify for physical products, maybe Squarespace can have more success with digital products and services. There are plenty of other digital products and services that people pay for, such as being part of a community, building a membership or content paywall website, building a paid newsletter, or buying an online course. Squarespace may aim to serve as the backbone and necessary infrastructure for this type of commerce.

Future Questions

  • Competition?

    I still am trying to figure out if there is really anything that sets companies in this industry apart from one another. I think the designer learning curve could be a potential competitive advantage, but then again I’m not sure how truly sustainable that competitive advantage will be.

    I’m also bullish on Shopify and I don’t see how Squarespace or any of its competitors will be able to compete with Shopify. I don’t see how competitors will be able to compete with Shopify considering the level of investment and the brand recognition that Shopify already has among entrepreneurs and small business owners especially after the transformational year of 2020. I doubt that Squarespace or any other company will have much success in competing head on with Shopify for a number of reasons. Shopify went head-to-head with Amazon and won.

  • What do website designers prefer?

    If the competitive advantage among these companies truly stems from where website designers prefer to work, I should probably figure out the answer to that question. Squarespace needs to appeal to consumers but likely needs to appeal to designers even more than consumers since these designers will likely influence where the website is ultimately built.

Conclusion

I always say whatever company I’m writing about is a good company. Describing a company as “good” probably means I’m neutral on the business. So I think Squarespace is a good business, but nothing that really blows me away and makes me want to invest within 15 minutes of reading about the company. That’s my filter for whenever I think a company is truly special. If the opportunity becomes obvious to me within 15 minutes, then I get pretty excited.


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