GoDaddy has had an impressive run over the past six months as its shares have beaten the S&P 500 by 8.7%. The stock now trades at $173.99, marking a 13.8% gain. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
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We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons why there are better opportunities than GDDY and a stock we’d rather own.
Founded by Bob Parsons after selling his first company to Intuit, GoDaddy (NYSE:GDDY) provides small and mid-sized businesses with the ability to buy a web domain and tools to create and manage a website.
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
GoDaddy’s ARR came in at $4.04 billion in Q4, and over the last four quarters, its year-on-year growth averaged 7.8%. This performance was underwhelming and suggests that increasing competition is causing challenges in securing longer-term commitments.
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
GoDaddy’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 85.5% in Q4. This means GoDaddy’s revenue would’ve decreased by 14.5% over the last 12 months if it didn’t win any new customers.
GoDaddy has a poor net retention rate, warning us that its customers are churning and that its products might not live up to expectations.
For software companies like GoDaddy, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
GoDaddy’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 63.9% gross margin over the last year. Said differently, GoDaddy had to pay a chunky $36.12 to its service providers for every $100 in revenue.
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