SMWB - Similarweb Manages For Profitability Amid Platform Enhancements (Rating Upgrade)

2023-12-01 15:47:50 ET

Summary

• Similarweb reported Q3 2023 financial results, surpassing revenue and earnings estimates.
• The company offers website traffic and analytics services to organizations globally.
• Similarweb's management is executing well with its new platform and appears focused on profitability.
• I'm Bullish (Buy) at around $5.00 per share.

A Quick Take On Similarweb

Similarweb Ltd. ( SMWB ) reported its Q3 2023 financial results on November 7, 2023, beating revenue and consensus earnings estimates.

The firm provides a wide range of website traffic and related analytics to organizations worldwide.

I previously wrote about SMWB with a Hold outlook on revenue growth challenges.

Management appears to be executing well with the company's new version 3.0 platform while managing for greater profitability.

Public stock markets are favoring profitable, predictable technology companies, so my outlook for Similarweb Ltd. is Bullish (Buy) at around $5.00 per share.

Similarweb Overview And Market

Israel-based Similarweb was founded to assist companies of all sizes in analyzing their website traffic to improve their online marketing results.

The firm is led by Co-Founder, and CEO Or Offer, who was previously a founding partner at AfterDownload which was later acquired by IronSource.

The company's primary offerings include:

• Digital Research - understand trends

• Digital Marketing - increase user acquisition

• Shopper Intelligence - improve conversion rates

• Sales Intelligence - increase sales pipeline

• Investor Intelligence - monitor investment opportunities.

SMWB provides a free version and paid levels based on feature set, geographic coverage, and number of users to a variety of business sizes.

The company tracks digital activity for hundreds of industries in more than 190 countries and obtains a large percentage of its annual recurring revenue ((ARR)) from customers who spend $100,000 per year or more.

According to a 2022 market research report by Grand View Research, the global market for web analytics was an estimated $34.6 billion in 2021 and is forecast to exceed $193 billion by 2030.

This represents a forecasted very strong CAGR of 21.1% from 2022 to 2030.

The main drivers for this expected growth are a continued rise in the automation of online marketing and growth in online shopping by consumers and businesses.

The chart below shows the historical and projected future growth trajectory of the U.S. Advanced Analytics market by application type:

Major competitive or other industry participants include:

• SEMrush

• AppAnnie

• Google

• Facebook

• Microsoft

• Adobe Systems

• SAS

Similarweb's Recent Financial Trends

Total revenue by quarter (blue columns) has continued to grow; Operating income by quarter (red line) has made substantial progress toward operating breakeven:

Gross profit margin by quarter (green line) has trended higher; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have trended lower, a positive signal:

Earnings per share (Diluted) remains negative but has made significant progress toward breakeven:

(All data in the above charts is GAAP.)

In the past 12 months, SMWB's stock price has fallen 1.95% vs. that of Semrush Holdings, Inc.'s ( SEMR ) rise of 15.19%, with the two firms' stock price trajectory largely tracking each other's:

For balance sheet results, the firm ended the quarter with $67.4 million in cash and equivalents and $25.0 million in total debt, all of which was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash used was $22.3 million, during which capital expenditures were $3.3 million. The company paid $17.3 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Similarweb

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be Semrush Holdings, Inc.:

(Source - Seeking Alpha)

SMWB's most recent unadjusted Rule of 40 calculation was 8.2% as of Q3 2023's results, so the firm has improved but needs to do better, per the table below:

(Source - Seeking Alpha)

Commentary On Similarweb

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023's results, management's prepared remarks and presentation highlighted that 55% of the company's total ARR (Annual Recurring Revenue) comes from customers spending more than $100,000 per year.

The firm has rolled out its new SimilarAsk generative AI offering that:

"uses Similarweb digital data to answer real questions that the user types in free text without having to know how to navigate our platform."

SMWB's customer base grew by 12% YoY to almost 4,400 customers, and the average customer spend is nearly $51,000 per year.

The company launched version 3.0 of its platform during the quarter with "better pricing alignment" with customers that management believes improves its offerings to enterprise customers.

In the earnings call, I tracked the frequency of various terms and keywords used by management and analysts:

The chart indicates the firm and its clients are experiencing macroeconomic headwinds, resulting in longer sales cycles.

Analysts questioned leadership about demand trends, the recent version 3.0 launch, and its forward outlook.

Management replied that it is starting to see some improvement in overall demand, especially in Europe and Asia Pacific.

With its new version 3.0 platform, customers are gaining access to more features but with lower initial capacity, i.e., a "metered" approach, enhancing the company's "land and expand" efforts.

Regarding outlook, management expects to ultimately get to 85% gross margins (81% now) with improved sales and G&A efficiencies.

Total revenue for Q3 2023 rose by 9.6% year-over-year, while gross profit margin increased by 7.2%.

For customers spending more than $100K per year in ARR, the firm's net revenue retention rate was 108%, down materially from 123% last year.

Selling and G&A expenses as a percentage of revenue dropped by 18.5% YoY, and operating losses were reduced by an impressive 75.8%, to only $4.7 million for the quarter.

The company's financial position is good, with ample liquidity and low debt but a material amount of free cash used in the last four quarters.

SMWB's Rule of 40 performance has improved but is in need of further improvement.

Looking ahead, full-year 2023 revenue is expected to grow at around 12.3% over 2022's result.

If achieved, this would represent a drop in revenue growth rate versus 2022's growth rate of 40.3% over 2021.

Regarding valuation, the market is valuing SMWB at an EV/Sales multiple of around 1.9x on TTM revenue growth rate of 16.8% against a median Meritech SaaS Index implied ARR growth rate of around 19% ( Source ).

The Meritech Capital Index of publicly held SaaS application software companies showed an average forward EV/Revenue multiple of around 9.8x on November 19, 2023, as the chart shows here:

So, by comparison, SMWB is currently valued by the market at a significant discount to the broader Meritech Capital SaaS Index, at least as of November 19, 2023.

Risks to the company's outlook include an economic slowdown in the U.S. that may be underway and uneven sales cycles, which may reduce its revenue growth potential in the near term.

A potential upside catalyst to the stock could include stronger activity in other regions as well as improved client usage of its 3.0 platform that may assist in its "land and expand" sales motions.

Management appears to be executing well and managing for greater profitability and perhaps lower growth, as evidenced by the trends for major metrics all going in the right direction.

Public stock markets are favoring profitable, predictable companies, so my outlook for Similarweb Ltd. is Bullish (Buy) at around $5.00 per share.

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