Spencer Platt
Elevator Pitch
I rate GoDaddy Inc. (NYSE:GDDY) stock as a Buy. My prior update for GDDY published on August 1, 2023, was focused on previewing the company’s second quarter financial performance.
In this latest article, I touch on the letter that activist investor Starboard Value sent to GoDaddy last month, which suggests that there are multiple avenues of unlocking value for GDDY. These potential value unlocking initiatives include expense reduction and even putting up the company for sale. I have changed my rating for GoDaddy from a Hold previously to a Buy, as I think that there are catalysts that could narrow the valuation discount between GDDY and its peers.
Share Price Reaction To Activist Move And GDDY’s Valuation Multiples
GDDY’s shares went up for four consecutive trading days between September 12, 2023 and September 15, 2023 (+3% cumulative gain) after news broke that Starboard Value, the company’s third biggest shareholder, issued a letter to GoDaddy.
This positive stock price reaction to the recent move by activist investor Starboard Value sends a clear message that GoDaddy’s shares are inexpensive and any indication of potential value creation could help to drive a valuation re-rating for GDDY.
In Starboard Value’s letter, it is highlighted that GDDY is valued by the market at 11.0 times forward FY 2023 price-to-free cash flow, which represents a substantial discount to the peer price-to-free cash flow median multiple of 17.9 times.
I view GoDaddy’s shares as undervalued using another more common valuation metric. GDDY trades at a consensus forward next twelve months’ normalized P/E multiple of 11.5 times (source: S&P Capital IQ), which is 43% lower than its all-time historical average P/E ratio of 20.3 times.
Profitability Improvement Levers
There are various levers that GoDaddy can potentially pull so as to expand the company’s profit margins, based on the company’s recent management commentary and suggestions put forward by the activist investor in its letter.
At the 2023 Citi (C) Global Technology Conference (GDDY’s most recent investor event) on September 6 this year, GoDaddy noted that revenue mix optimization, operating efficiency, economies of scale are factors that could push up its profit margins higher.
GDDY indicated at the Citi investor conference last month that its Applications and Commerce or A&C “segment is at higher margins” and is expected to have “a bigger impact on our overall margin profile” as “it gets bigger.” GoDaddy’s proportion of sales contributed by the A&C business segment increased from 31.2% in the second quarter of last year to 33.6% for Q2 2023 as disclosed in its most recent quarterly results presentation. GDDY is guiding that the revenue derived from its A&C and Core Platform segments will grow by +9%-11% and +1%, respectively in FY 2023. In other words, a favorable sales mix in the future should play a big role in improving GoDaddy’s profitability.
At the Citi investor event in September, GoDaddy also noted that “operating leverage will help us drive our margins into the future,” thanks to the “efficiency we have been able to create through consolidating our technology stack.” In other words, GDDY has become leaner and thinks that it can enjoy the positive effects on profitability resulting from growing revenue on a fixed cost base. Also, Starboard Value mentioned in its letter that GDDY “spent nearly $800 million in Technology & Development expenses,” which implies that there is “an opportunity for cost rationalization” in this particular area.
Rule Of 40
GoDaddy didn’t meet the “Rule of 40” last year, and the market doesn’t think that GDDY can do so this year as well. As per financial data taken from S&P Capital IQ, GDDY’s revenue growth and EBITDA margin for FY 2022 were +7.2% and +24.8%, respectively. The analysts currently see GoDaddy reporting a top line expansion and EBITDA margin of +4.1% and +25.7%, respectively for the current fiscal year.
As it stands now, the market consensus is predicting that GoDaddy will only achieve a combined revenue growth and EBITDA margin of more than 40% by FY 2027. This explains why GoDaddy’s valuations are depressed.
Assuming that GDDY can improve its EBITDA margins without sacrificing too much on top line growth, GoDaddy might be able to achieve the “Rule of 40” earlier than what the market is currently expecting. This could be the re-rating catalyst that GDDY needs.
Potential Sale
It won’t be farfetched to imagine that GoDaddy could potentially be sold sometime in the future and this will realize value for GDDY’s current shareholders.
In fact, GDDY was bought over by private equity players, Silverlake and KKR, in 2011, prior to being publicly listed in a 2015 IPO. Late last year, there was speculation that Starboard Value, which also has an equity interest in GDDY’s peer, Wix.com (WIX), might be interested in pushing for potential M&A transactions involving WIX and GDDY.
In Starboard Value’s letter, the activist investor had emphasized that GoDaddy’s “Board should also remain openminded about alternative value creation opportunities, which could include a potential sale of the Company.” This means that an acquisition of GDDY by a third party is another potential way to unlock value for the company’s existing shareholders.
Concluding Thoughts
I have turned bullish on GoDaddy, considering the various actions that GDDY can take to enhance shareholder value. This explains my decision to upgrade my investment rating for GDDY to a Buy.
