SEMR - Semrush Holdings Doesn't Show Convincing Prospects For The Future

2023-07-24 04:20:40 ET

Summary

• Semrush Holdings' 2023 Q1 performance continues to demonstrate its capabilities of efficient growth.
• The company has cost advantages with a significant presence of developers in Russia. It also has a robust culture.
• The market will get more crowded as many companies offer SEO services. SEO is a very competitive task and always allows multiple players.
• It is difficult to build strong buy convictions around SEMR given the uncertainty.

Semrush Holdings ( SEMR ) is a standout software platform, empowering marketing professionals with efficient campaign management and measurement capabilities across multiple channels, significantly boosting their online visibility. Its extensive suite of tools covers various functionalities, including SEO, keyword research, rank tracking, competitive analysis, site audits, and on-page optimization. However, it's worth noting that the stock has shown slight underperformance compared to the SP500 in recent years. In this article, I will delve into my thoughts on Semrush and the challenges of having strong convictions about buying the stock.

Business upgrade

In the first quarter of 2023 , SEMR showcased its strong market presence, highlighting an encouraging growth trajectory driven by product expansion, a surge in new customer additions, and sustained demand for organic marketing solutions. The company reported impressive financial results, with Q1 revenue reaching $70.9 million, marking a remarkable 24% increase YOY. Additionally, Annual Recurring Revenue ((ARR)) amounted to $293 million as of March 31, 2023, representing a 23% YoY growth. The company's solid customer base continued to expand, boasting over 100,000 paying customers as of March 31, 2023, signifying a remarkable 15% YoY increase. Customers who pay more than $10K annually grew by more than 45% YOY. More than 20% of SEMR customers buying two or more products / Apps. However, the Dollar-Based Net Revenue Retention slightly decreased to 116% in the same period, compared to the previous quarter's 118%. It is still pretty good to me, given the challenging macro environment.

Continue the impressive operational efficiency

During the quarter, SEMR has introduced a range of new Generative AI tools , catering to writing and image generation. The company also expanded its capabilities through the acquisition of Traffic Think Tank ((TTT)), a renowned marketing education company and community that offers premium content from top-notch marketers, further enhancing the SEMR Academy. Furthermore, the App Center now boasts a total of 51 apps, with 25 of them being developed by third-party partners, enriching the platform's offerings. Additionally, SEMR welcomed a new CFO to strengthen its leadership team.

Despite achieving 268M in sales and 218M in gross profits (with a gross margin of over 80%), the company efficiently manages its resources, requiring only 295M of total assets. As depicted in the chart below, SEMR maintains its total assets consistently while rapidly increasing its revenue and gross profits. This proficiency in managing costs and capital is commendable, especially considering SEMR's significant expansion in its business lines in recent years.

In my opinion, SEMR enjoys a natural cost advantage in software development due to its significant presence of developers in Russia and its deep-rooted Russian heritage. Additionally, their robust company culture ( Glassdoor score 4.2) and diligent work ethic play pivotal roles in enabling them to stay abreast of the latest trends in SEO and algorithm changes. The ongoing conflict in Ukraine might also benefit SEMR, attracting even more talented individuals seeking excellent job opportunities abroad.

The market is becoming crowded, and segmentation is unavoidable

The market for SEO, market intelligence, and content analytics is vast, driven by the growing digitalization of businesses seeking effective ways to market their products and services. While SEMR offers affordable and comprehensive solutions for lower-end SMB customers with its array of 55 tools , I believe it may face challenges moving ahead. In the competitive SEO landscape, rivals such as Moz, Ahref, Screaming Frog, and Surfer SEO are equally capable of challenging SEMR. Even website builders like Shopify and Wix are now offering compelling SEO features.

Furthermore, the nature of SEO inherently involves competition and the need to stand out in search engine rankings. Given this dynamic, it becomes challenging for SEMR to become the sole dominant provider, as SEO effectiveness relies on diversity in strategies and tools. No one tool can cover all aspects comprehensively, and users often find it necessary to utilize multiple platforms to compare data and gain different insights. As the market evolves, it will likely consolidate and segment into various niches. For instance, Ahrefs might be preferred for backlink analysis, while SEMR is sought after for keyword research. In this landscape, SEMR lacks a unique and exclusive product offering, which means it will constantly encounter competition as the market progresses.

Price Actions

Regarding price movements, the chart below shows the price action characteristics between 2022-10-17 to 2023-07-20. SEMR showed wider daily return fluctuations than the market average, with a standard deviation of about 3x of SP500. Most days have positive returns but underperforming SP500. The stock often traded in an intraday range, with most times dropping or raising 3% from the open price. When shocking good/bad news comes, you could see one day fall for 10%+. There was one time it dropped 20% in a day from the open.

When examining the correlation ratio of SEMR prices to various major sector ETFs, SEMR primarily correlates with sectors such as Oil & Gas Exploration & Production ( XOP ). However, even with the highest correlation ratio reaching only 0.48, it indicates that SEMR is largely independent of overall market movements. This suggests that SEMR's performance is not heavily impacted by broader market trends, providing investors with unique opportunities for portfolio diversification.

Bottom Line

In terms of its financial outlook , SEMR is projecting full-year revenue of $306 to $309 million for 2023, representing a robust growth rate of approximately 21% YoY at the midpoint. The company's non-GAAP net income guidance is expected to range from breakeven to $3 million. Looking ahead, if SEMR maintains a 20% growth rate for the first 5 years and a 15% growth rate for the subsequent 5 years, it could potentially achieve $1.34 billion in revenue over a 10-year period. This projection would result in an EV/Sales ratio of approximately 1.13x at year 10 (current EV value of 1.18B). However, it is essential to consider that the business's durability is a concern due to increasing competition and the emergence of the metaverse and AI technologies, which may impact SEMR's growth prospects. Therefore, the current EV/Sales ratio of 4.4 does not appear to be significantly undervalued. At this point, I cannot have strong buy convictions about SEMR.

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