GoDaddy Stock Analysis Reveals Huge Risks

 

  • A web-services provider and domain registration leader, GoDaddy went public last week.
  • The 18-year-old company presents little revenue growth, a negative bottom line, and huge long-term debt.
  • GoDaddy shows almost no technological innovation and doesn’t try to reach out of the highly competitive, low margin web services market.
  • At this point, investors should avoid GoDaddy’s stock.
GoDaddy stock analysis post IPO

Web services provider, GoDaddy (NYSE:GDDY) went public last week in a very successful IPO, and its stock soared 30% on its first day of trading. Initial IPO price range was between $17 and $19, and high demand drove it up to $26 that reflects a $4 billion market cap for the company. Biggest winners from the IPO are the three private equity funds – KKR, Silver Lake and TCV – that acquired 68% of the company in a leveraged buyout deal in 2011 for $2.5 billion. According to GoDaddy’s S1, only $25 million out of the $600 million of IPO proceeds will end up in GoDaddy’s accounts, while most of the proceeds will be used to pay the holding funds and repay a senior note.

(Also see our posts on popular Tech IPO's: Etsy IPO and Cloudera IPO)

GoDaddy is an Internet veteran founded 18 years ago during the dot-com boom. The company that is mainly familiar because of its controversial Superbowl ads, Danica Patrick's sponsorship, and scandalous former CEO Bob Parsons is trying to improve its brand, and going public is a part of that attempt. This is the company’s third attempt to go public after previous attempts to go public in 2006 and 2014 failed due to a lack of interest and low demand.

GoDaddy Financials

GoDaddy’s core business and historical revenue generator is the domain registration segment, in which the company generates revenues from registering domain names with ICANN, the organization responsible for domain registration on the Internet. Domain registration activity does not require any sophisticated technology or innovative thinking and, as a result, has low barriers to entry, which drive high competition in the market. GoDaddy’s historical position as the market leader enabled it to generate $763M from this segment in 2014, which accounts for 55% of the company’s total revenues that year. The intense competition and lack of innovation in this segment drive a slow quarterly growth of 3%.

In order to generate additional revenues, GoDaddy started to offer complimentary services to its domain customers such as hosting and presence services and business applications. In the hosting and presence segment, GoDaddy offers a variety of web hosting options, website builder products, SSL certificates, and online commerce products that have a higher margin than the domain name registration segment. This is the second largest segment, and it accounts for 36% of the company’s revenues in 2014. The business application segment is the smallest of the three, accounting for only 8% of the company’s revenues, but as shown in chart 1 below, it is the fastest growing segment with an 11% quarterly growth rate.

GoDaddy_Chart 1_040515

Even though GoDaddy increases revenues quarter-over-quarter and year-over-year, it also grows its operating expenses and cost of revenue, resulting in an operating loss and negative bottom-line. GoDaddy is not a start-up in its growth phase; it is a mature, 18-year-old company that has been unable to meet a break even point for almost two decades – that’s an alarming sign for investors.

Another disturbing sign is the company’s long-term debt, which exceeds $1.4B - 3 times its equity and 1.15 times its revenues. One part ($300M) of the long-term debt is a senior note that has a 9% interest rate. It is due in 2019 and expected to be repaid with the IPO proceeds in order to issue new debt with better terms. Even though this is a step in the right direction towards improving the company’s debt burden, the company will still have an enormous $1.4B in debt, driving an interest expense of almost $150M in 2015.

GoDaddy Growth and Valuation

To be fair, as shown in chart 2, GoDaddy is narrowing its losses every quarter since the three private equity firms acquired it from the previous owners. However, the company’s biggest problem is its lack of innovation and new initiatives. GoDaddy operates in a highly competitive market with low margins, and instead of driving new innovative ideas and trying to reach out of the limited web services market, the company invests further in web services and relies more on selling complimentary web services to its domains customers. Even if GoDaddy moves into net profit territory, the company has no substantial growth prospects, and investors looking for potential growth or value innovation will not find it in GoDaddy.

GoDaddy_Chart 2_040515

GoDaddy Stock Analysis reveals a P/S ratio of 2.9, which is very close to tech giants as Apple (AAPL) with 3.65, Microsoft (MSFT) with 3.54 and Amazon (AMZN) with 1.94. Even though the P/S ratio is close, the differences between these three companies and GoDaddy is huge, and with no growth potential, investors could easily choose one of these leading tech companies to invest their money in instead in GoDaddy. As I expect GoDaddy’s price to go down after the IPO, its P/S ratio will follow and be very close to 2 and reflect no appealing valuation for growth investors.

Such a small P/S ratio would fit a dividend company more than a growth company. However, GoDaddy has very poor financials and does not pay any dividends to its investors except the holding private equity firms that receive a management fee and a portion of the IPO proceeds.

Conclusions

Web services provider GoDaddy went public last week in a very successful IPO. The P-E backed tech company presents increased revenue and decreased losses but has no bright prospects for the future, and its growth potential seems unclear. The fact that most of the proceeds go to the holding funds, the lack of innovative initiatives, the negative bottomline after 18 years in the business and the huge debt on its books makes GoDaddy a stock to avoid. I will revisit my GoDaddy Stock analysis thesis in the future if GoDaddy takes any action that indicates a future catalyst.

Disclosure: The information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

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Comments on this article and GDDY stock

stocksman
bearish
Good one. Did not know that Godaddy has not made any profits in last 18 years. Why did the stock jump so much on day 1? Just crazy markets?
1 reply
user profile picture
lior-ronen
bearish
There are many factors and many different reasons: day traders, IPO funds, ETFs, institutional investors - wanted to buy no matter what some for the short term, some for the long term and that spiked the price. Other investors did not joined the party and this is why once the public trading started the stock price did not continue to rise, but stayed relatively flat. makes sense?
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