Is Godaddy Inc (GDDY) A Good Stock To Buy?

Is Godaddy Inc (NYSE:GDDY) a good stock to buy?  Godaddy Inc is a $7-billion market cap technology company that is engaged in domain name registration, web hosting, cloud business apps, and other online IT services. It has nearly 17 million customers around the world and more than 72 million domain names under management. Sometimes we come across good investment write-ups on the internet that we’d like to bring to your attention. In this article, we will take a look at an investment thesis on Godaddy by a Reddit user.

According to the user, ForTheSeamless, Godaddy’s fundamentals are “significantly misunderstood” and there is “30-50% upside from current levels.” The user believes that the Godaddy Inc has an “extremely high-quality business with long run-way for growth” and its stock is mispriced as the company’s industry, business model, and competitive dynamics are misunderstood, leading investors into the “excessive competition” bear thesis. Godaddy’s main competitors include Namecheap, Hostgator, and DreamHost.

Here are the user’s comments:

GoDaddy’s main competitive advantages are its scale, brand, and monopoly-like position in domains.

Scale is mainly needed for sustaining the large up-front sales and marketing expenses required for acquiring customers. The combination of large initial sales and marketing investments and low initial revenue from customers is a key barrier to entry for smaller players and also helps GoDaddy sustain its market leading position. This is one of the things that many investors view as a negative but in reality is a great benefit for GoDaddy.

GoDaddy’s market leading position in domains is a key structural competitive advantage because domains are the first step in establishing an online presence. This allows GoDaddy to get “first picks” for customer acquisition and provides more up-sell opportunities. This is particularly important because of switching costs and habit that’s formed as customers bundle products.

Namecheap is a good business, but it lacks scale so I am not too worried about them. Notice they don’t even offer phone support for customers, which in my opinion is an essential service for the business model. The biggest competitive threat would be website builders such as Wix, Squarespace, and Weebly because they all have good brands focused on a good product for customer acquisition, however I think GoDaddy will be OK because they lack scale compared to GoDaddy, face intense competition against one-another, and because GoDaddy also has its own website builder product.

IMO it all goes back to the crux of the thesis – that there’s a significant misunderstanding of what GoDaddy’s business is and what its future looks like. I think the multiple expansion is simply investors slowly but steadily appreciating GoDaddy’s fundamentals over time as results continue to improve, ie. as top-line and FCF grow and GoDaddy nears GAAP profitability (not that profitability is important for GoDaddy since GAAP earnings understate FCF generation, but it’s worth nothing since it’s a big psychological milestone/criteria for many investors).

Yuganov Konstantin/Shutterstock.com

Yuganov Konstantin/Shutterstock.com

Many investors, according to the thesis, view Godaddy Inc (NYSE:GDDY) as a 19-year old mature tech company that provides commodity services in a highly-competitive industry, faces competition from tech giants such as Google, and trades at a premium to peers and seems expensive on every metric that’s not free cash flow (FCF).

Nevertheless, ForTheSeamless believes that GoDaddy has transformed its business from niche domain provider to the one-stop shop to build a strong online presence.

Here are more comments by the user:

GoDaddy went from commodity business to a unique, differentiated business with a huge customer value proposition, ie. helping people across the globe develop an online presence by providing simple, easy to use products, and great customer service. This represents a huge, fragmented market opportunity with a long-runway for growth and GoDaddy is the best positioned company in the world to capture this opportunity. Will address competitive dynamics as part of the response to your third question.

Shares currently trade at 16x EV / 2018E FCF which I think is still too cheap considering GoDaddy’s fundamentals, long-term prospects, and expected FCF growth of mid-double digits to high single digits over the medium term. I view HEG acquisition as a nice surprise in terms of GoDaddy accelerating their international strategy and good opportunistic use of capital, but not necessarily game changing.

Their top-line is growing at a double digit clip from a healthy mix of customer growth and ARPU growth, they’ve successfully been launching new products, there’s a large addressable market and they’re best positioned to capture it, and they’re benefitting from multiple long-term secular tailwinds (increasing importance/necessity of e-commerce, increasing products/services necessary to establish an online presence).

Overall gross margins will expand a few % over time as the fastest growing segments are also the highest margin, and with more scale they can get a few more % of expansion through SG&A leverage.

Would also flag that their competitive positioning is improving over time as competitors with broken business models (EIGI, WEB) continue to worsen and eventually go bankrupt or sell.

Shares of Godaddy Inc (NYSE:GDDY) are up over 33% this year. During the last 12 months, the company’s stock has gained more than 28%. Meanwhile, Godaddy’s financial results for the second quarter ending June 30 were impressive. Total revenue was around $558 million, up 22.3% year-over-year (YoY), while average revenue per user (ARPU) was up 2.8% YoY to $129. The company posted a profit of $18.1 million for the second quarter, versus a loss of $11.1 million in 2016.

For the full-year 2017, GoDaddy raised its revenue expectations to a range of $2.22 to $2.23 billion, which shows about 20% growth at the midpoint.

Meanwhile, Godaddy Inc (NYSE:GDDY) is a popular stock among hedge funds tracked by Insider Monkey. There were 34 funds in our database with bullish positions in the tech firm. Among those are 12 West Capital Management, SQN Investors, and Garelick Capital Partners.