Billionaires like Buffett claim the headlines but Jeffrey C Smith has grown in prominence to build over $5 billion in assets under management. Remarkably, his largest position commands a 14.7% stake in his portfolio, and he’s allocated it to a well-known stock that appears significantly undervalued: GoDaddy. What’s the bull case for his purchase?
GoDaddy Investment Thesis
A standout feature of GoDaddy’s financials is the steady and reliable revenue growth. We studied the past 12 quarters of revenues and found the top line growing year-over-year in each and every one.
- 2020 Q2: 9.4%
- 2020 Q3: 11.0%
- 2020 Q4: 12.0%
- 2021 Q1: 13.8%
- 2021 Q2: 15.5%
- 2021 Q3: 14.2%
- 2021 Q4: 16.6%
- 2022 Q1: 11.3%
- 2022 Q2: 9.0%
- 2022 Q3: 7.2%
- 2022 Q4: 2.0%
- 2023 Q1: 3.3%
Better still, operating income has been positive in 11 of the past 12 quarters. And it appears that management has not slept at the wheel of what seems to be a compelling investment opportunity; the Board of Directors approved a $3 billion share repurchase plan on February 10, 2022.
Do the numbers stack up to justify such a large buyback? We think so.
We ran a five year discounted cash flow forecast analysis to identify where fair value for this $70 and change stock may sit, and discovered that it sits at close to $98 per share.
To corroborate our analysis we investigated what Wall Street analysts jotted down as their consensus target price, and the two numbers are pretty close. Of the 14 analysts covering the stock, the price target consensus was $92 per share.
Generally, we are a bit more pessimistic than the Street so we looked under the surface a little deeper to identify what might be keeping analysts more muted on the stock’s prospects. The balance sheet offers one clue: cash sits at $892 million while long-term debt sits at $3.8 billion, a relatively hefty debt load.
What Should Investors Worry About?
But perhaps what keeps analysts and investors up at night is the prospect of competition from Bluehost, HostGator, SiteGround, NameCheap, and the big gorilla, Google Domains.
When it comes to choosing a domain registrar and web hosting, purchases generally evaluate based on price, features and reputation. Where GoDaddy has a competitive edge is its brand is very well known in the marketplace.
On price and features however, a studious buyer may consider alternatives. The question is will they? From our research, the company has 21 million customers, and that’s a really sticky group of customers that are likely to sustain the company’s revenue stream for the foreseeable future.
Nevertheless, customer churn is a bit bigger than we would like to see. According to the company’s reports last year, customer retention rates have remained above 85%. That’s pretty good but not stellar. By contrast, Snowflake sees a net revenue retention rate well north of 100%, suggesting not only do customers stick around they pay more each year.
Of course, the two businesses are like comparing apples and oranges but the point is if you can build a world class product customers will stick around and pay more each year. We would like to see GoDaddy innovate its product to the point that customers are deriving so much value they cannot leave.
With that said, the current valuation is compelling, and clearly sufficiently so to entice a billionaire to put almost 15% of his portfolio in it.