SMWB - Similarweb Has A Long Runway Ahead

2023-07-28 04:21:58 ET

Summary

• This article reports a slowdown in business operations.
• It suggests that the market size may not be as large as initially claimed by SMWB.
• Despite challenges, the business's durability makes it a viable long-term investment.

Similarweb Ltd (SMWB) serves as a powerful digital intelligence platform, enabling senior leaders, strategy, business intelligence, and consumer insights teams to conduct comprehensive analyses of market performance, competitor benchmarks, and emerging trends. This tool facilitates in-depth research into individual companies and offers valuable insights into audience behavior, directly influencing strategic business decisions. While SMWB has underperformed the S&P 500 since its IPO, I believe that the current short-term headwinds are not overly concerning. Considering its potential, the stock merits serious consideration for a buy rating.

Business update

Amidst the challenging macroeconomic landscape, SMWB demonstrated resilience with a 19% revenue growth over Q1 2023 reaching 52M. Their global customer base, comprising SMB enterprise and strategic accounts, expanded by 14% year-over-year, encompassing nearly 4,200 customers. Furthermore, the average customer spending rose by 4% to approximately $51,000 annually. This positive trajectory was complemented by an impressive gross margin of nearly 80%, setting a new record for the company. The pursuit of sustained positive free cash flow by Q4 remains a focal point for SMWB, and the Q1 results underscore the substantial progress made towards this goal. In addition to these efforts, the company is proactively optimizing its operations by reducing headcount by 6% in Q2, further enhancing profitability.

The ARR and retention rate slowed down

However, SMWB faced a notable setback, with its ARR growth decelerating substantially from 51% in Q1 of the previous year to 19% in Q1 2023. Its revenue growth of 14% falls behind peer companies like SEMR, which achieved 24% growth. Moreover, the company's retention rate has been consistently declining, as evident from the chart below. While slower growth is a common occurrence for tech companies as they refine their business strategies and prioritize profitability, it also introduces uncertainty regarding when the deceleration will stabilize and what the true long-term growth rate will ultimately be.

The true addressable market may be smaller than expected

Another observation is that SMWB's target market space may not be as extensive as they claim. The management estimated a 44B TAM opportunity, calculated by multiplying the total number of companies with over 100 employees (850k) by the average revenue per customer (51K). However, in my opinion, SMWB's solutions are more attractive to enterprise-level clients rather than SMBs. Not all SMBs may be able to afford or find value in the competitive analysis SMWB offers, as their businesses are often more localized compared to larger national or global companies. Moreover, there is fierce competition among very top-tier companies, which may have access to highly skilled consulting firms that can provide more customized solutions. To be conservative I believe the true TAM may currently stand at 22Bn (simply cut the expectation in half).

SMWB stands to gain significant benefits from AI

At its core, SMWB is a company that focuses on providing insights in business strategy, marketing, sales, and e-commerce. It requires a tremendous amount of effort to collect and analyze data in various formats. The recent advancements in AI present a positive outlook for SMWB, as they can become a major user of these technologies. With the emergence of LLM (large language models) and their widespread adoption, SMWB gains significant power in understanding, summarizing, and generating massive amounts of information they collect. This development is unprecedented for SMWB, especially considering they have been collecting user behavior data for the past 10 years.

One interesting point was shared by the CEO below which I totally agree with.

Once AI will be training on all the coverage that Similarweb digital data has we will be able to develop new capabilities to conduct extensive analysis for companies from simple queries of their specific needs and provide prediction of what will be next.

Previously, SMWB faced significant limitations in customization, as it was impractical to create specific interfaces and tools for all user types and use cases. Moreover, SMWB was reluctant to provide comprehensive APIs, as they sought to protect their proprietary data from being downloaded. As a result, SMWB could not fully showcase the true potential of their data. However, with the current AI opportunity at hand, there is a promising possibility for them to overcome this challenge and enhance their platform's accuracy and customization capabilities. For example, they may develop a chatbot that could answer business questions and generate reports based on their datasets and user input.

The business model is very durable

SMWB appears to be a highly resilient business with a promising future. Its unique business model presents a wealth of opportunities for growth and expansion. By sourcing data from various channels, including public sources and real users, as well as collaborating with customer companies to gather digital engagement information, SMWB has amassed significant expertise in obtaining representative and high-quality data. The company's proficiency in offering appropriate incentives to users for their participation has contributed to building trust with clients over time. As SMWB's user base continues to grow and their product gains greater traction, the company is well-positioned to assert dominance in its market niche.

Bottomline

In conclusion, SMWB shows early signs of being a high-quality business with a promising future ahead. Despite recent challenges to its growth prospects, the digital intelligence market is expected to continue expanding. The company operates with exceptional efficiency and has no significant long-term debt while maintaining minimal share dilution over the past two years. The significant insider ownership (26%) and backing from reputable hedge funds and VC firms (52% share) provide valuable experiences and incentive structures to drive the business forward.

In terms of valuation, SMWB's current EV/sales ratio stands at around 2.5x, significantly lower than its peers like SEMR. Nielsen, a similar business model in the media sector, was sold to Brookfield for $16B at a much higher 5x price/sales multiple which also makes SMWB undervalued in general. Though the market is currently grappling with the slowing growth rate and potential ceiling for SMWB's true TAM, the demand for digital competitiveness analysis is anticipated to remain strong, ensuring the company's long-term presence. As growth and market sentiment stabilizes, I think SMWB is poised to regain its upward trajectory moving forward.

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