SMWB - Similarweb: Seizing The Opportunity In The Growing Digital Intelligence Market

2023-05-31 07:57:52 ET

Summary

• Similarweb is a leading digital intelligence platform with comprehensive data assets, positioning it well to benefit from the growing need for alternative data sources in the digital landscape.
• SMWB is focusing on growth and investing in sales force and product development, with profitability expected to be achieved in 2025.
• I have an end-of-year price target of $8.2 on the stock.

Investment Thesis

Similarweb Ltd. ( SMWB ) has emerged as a leading digital intelligence platform, providing comprehensive data covering internet, mobile internet, and mobile applications. With the increasing shift of revenue to digital channels, businesses and investors have a growing need to understand the digital landscape better. Similarweb stands out by collecting data from over 60 diverse sources and differentiating itself through its data synthesis process, which involves cleansing, matching, and categorizing the data, followed by modeling it using proprietary algorithms. I have an end-of-year price target of $8.2 derived through a 2.5x sales multiple to CY24 revenues of $256 million, a discount to faster-growth peers due to lower profitability compared to other faster-growth software names.

Q1 2023 Earnings: Paving the Way for Sustainable Growth

I believe that first-quarter 2023 revenue was largely in line with expectations; however, there was a decline in net retention and a slowdown in the growth of remaining performance obligations compared to the previous quarter. These factors reflect the current demand environment. The management mentioned that sales cycles are getting longer, and upselling opportunities with existing customers were less pronounced in the first quarter of 2023.

SMWB is making progress towards improving its financial situation and anticipates a 6% reduction in force in the second quarter, which could enhance margins in the second half of 2023. Revenue growth met expectations, and there was a positive development in gross and operating margins compared to the previous quarter. The management reaffirmed its revenue growth guidance for the fiscal year 2023, aiming for approximately 15% year-over-year growth, and aims to achieve positive free cash flow by the end of the fourth quarter of 2023. Although challenging macroeconomic conditions are likely to affect short-term growth, SMWB aims to exit this period with improved financial health while investing in product development and sales efforts to attract enterprise customers, which could lead to significant differentiation and future growth.

Differentiated Digital Intelligence Player

SMWB has established a strong position in the digital intelligence field thanks to its valuable data assets. These assets include a contributory network, partnerships with prominent data-focused companies like ISPs, and direct measurement from opted-in websites and apps. The company has developed its proprietary data cleaning and modeling process over many years, further enhancing the quality of its dataset. This comprehensive data, combined with SMWB's extensive experience in the industry, provides marketers, particularly at the enterprise level, with a unique digital data asset.

I believe Similarweb is positioned to benefit from consumer data landscape changes. As marketers face challenges in a post-IDFA/cookie world, they may seek alternative methods to optimize their digital marketing strategies due to the reduced availability of third-party customer data. SMWB's product portfolio fills this data gap effectively. For instance, Airbnb leveraged Similarweb's data to refine its digital marketing strategy when entering new markets. Similarweb's insights on ad keywords, publishers, referrers, and top traffic sources used by competitors already in the market proved invaluable. A case study highlighting the collaboration between Similarweb and Airbnb demonstrates this. Additionally, MGM relies on Similarweb as its exclusive market intelligence tool for identifying and evaluating marketing affiliates. SMWB empowers MGM to research potential affiliates' performance, prioritize new affiliates by monitoring relevant keywords, and compare search traffic among existing affiliates.

Financial Outlook & Valuation

Similarweb is currently in its early stages with a customer base of less than 4,000. The company's primary focus for the next 3-5 years is on achieving growth rather than prioritizing profitability. The COVID-19 pandemic accelerated the adoption of e-commerce, which was already experiencing growth prior to the pandemic, and revealed gaps in companies' understanding of their digital presence. The sustained growth of e-commerce post-pandemic is expected to drive the demand for digital analytics platforms like Similarweb. With a combination of customer expansion and increased average revenue per user (ARPU), I expect Similarweb to continue to grow at a rate of 20%+ in the medium term. Similarweb is making significant investments in its sales force and product development. As a result, the company is anticipated to incur operating losses until 2024, with profitability expected to be attained in 2025.

When considering Similarweb in comparison to other companies with similar financial profiles, there are three notable companies that stand out: Qualtrics, Sprout Social, and SEMrush. Compared with these, Similarweb is currently trading at 1.9x EV/2023E Sales, which is at a discount to its peers. I have an end-of-year price target of $8.2 derived through a 2.5x sales multiple to CY24 revenues of $256 million, a discount to faster-growth peers due to lower profitability compared to other faster-growth software names.

Risks

The primary risk for a recently listed software company to achieve success is sales execution. IPO companies, particularly newer and fast-growing ones, face heightened scrutiny when it comes to hiring, training, compensating, and managing their sales teams. Any missteps in sales execution often result in earnings falling short of expectations, leading to underperformance in stock prices. Moreover, Similarweb mitigates data gaps by leveraging over 60 different data sources, ensuring redundancy to address any potential shortcomings. The company is also fully compliant with existing data privacy regulations. However, if an event were to occur that jeopardizes access to data on a large scale, undermining its effectiveness for customers, it could lead to sales and customer issues, potentially putting downward pressure on the company's stock.

Conclusion

As the shift towards digital channels, including e-commerce, gains momentum, there is a growing need for reliable alternative data sources among various stakeholders, such as businesses and investors. Similarweb has positioned itself as a prominent digital intelligence platform, offering comprehensive data covering Internet, mobile Internet, and mobile applications. I anticipate that this strong market position will result in sustained revenue growth and increasing operating leverage in the medium term, which will contribute to the outperformance of Similarweb's shares. Hence, I view the stock as a long-term buy at current levels.

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