WIX - Sizing Up Squarespace

2023-12-12 16:01:17 ET

Summary

• Squarespace, Inc. is seeing solid revenue growth and moving quickly towards profitability.
• However, valuations seem somewhat stretched at current levels and there has been some notable insider selling in the stock.
• An analysis around Squarespace follows in the paragraphs below.

To be of good quality, you have to excuse yourself from the presence of shallow and callow minded individuals .”? Michael Bassey Johnson.

Today, we put Squarespace, Inc. ( SQSP ) in the spotlight. The stock has not yet lived up to the hyperbole that accompanied its public debut on the markets in the spring of 2021. However, the company is delivering sales growth in the mid-teens and moving quickly to profitability. Are the shares now in the "buy zone"? An analysis follows below.

Company Overview:

Squarespace is headquartered in New York City and came public in the middle of the 2020/2021 IPO/SPAC craze, largely fueled by the easy money policies of the Federal Reserve at the time. The company has developed and operates a platform for businesses and independent creators to build online presence, grow their brands, and manage their businesses across the Internet. Squarespace allows customers to build websites and other capabilities to sell products as well as providing web hosting services. The company's vision is to provide entrepreneurs with a single online hub for all their web-based needs. The stock currently trades just over $27.00 a share and sports an approximate market capitalization of $3.8 billion.

Third Quarter Results:

Squarespace posted its Q3 numbers on November 7th. The company delivered a GAAP loss of 12 cents a share. Revenues rose just over 18% on a year-over-year basis to $257.1 million, some $5 million above expectations. $12 million of revenue was the result of price increases. Annual run rate revenue or ARRR also increased 18% year over year to $1,013.5 million in 2023. It was the first time ARRR exceeded the $1 billion mark. Adjusted EBITDA came in at $66.5 million, significantly above the $43.7 million from the same period a year. Unique subscriptions rose five percent to 4.4 million, while the company's average revenue per user or ARPU was up 10% to $226.05.

Management raised FY2023 sales guidance slightly to Revenue of $1,002 million to $1,006 million. Leadership also sees unlevered free cash flow of $232 million to $236 million on a non-GAAP basis.

Analyst Commentary & Balance Sheet:

The analyst community is currently not sanguine about Squarespace's current prospects at the moment. Since third quarter results hit the wires, five analyst firms including Barclays and Oppenheimer have reissued Hold/Neutral ratings on the stock. Price targets proffered range from $32 to $34 a share. William Blair, Bank of America ($35 price target), Citigroup ($40 price target) and D.A. Davidson have maintained their Buy ratings on Squarespace.

Approximately six percent of the outstanding float in the shares are currently held short. Several insiders have been frequent, consistent and large sellers of the stock in 2023 to date. So far just in the fourth quarter they have disposed of just under $9 million worth of equity collectively. In addition, a selling stockholder offered up six million shares in mid-November via a secondary offering . A similar event happened in September as well.

Squarespace ended the third quarter with just over $215 million worth of cash and marketable securities on its balance against some $580 million of debt. Management has guided that it sees net interest expense on this net debt (after tax benefits) of between $26 million and $27 million. Squarespace delivered $53 million worth of operating cash flow in the third quarter, up 29% from 3Q2022.

Verdict:

The company lost a $1.80 a share in FY2022 on $867 million worth of revenues. The current analyst firm consensus has Squarespace delivering a small profit of seven cents a share in FY2022 on sales rise 15% to $1.01 billion. They project similar sales growth in FY2024 resulting in earnings of 43 cents a share.

Squarespace, Inc. is delivering solid revenue growth. However, the shares trade at 3.8 times 2023's projected sales and 65 times FY2024E earnings per share. The stock is considerable cheaper on an operational cash flow yield basis, it should be noted.

Competitor Wix.com Ltd. ( WIX ) is seeing revenue growth in the low teens. However, that company is already very profitable, and the stock trades at under 23 times FY2024E earnings per share and with a similar price to sales ratio as Squarespace, in way of comparison. Wix's balance sheet is also in much better shape. Add in the considerable insider selling in the shares in SQSP, the recommendation is to pass on any investment at this time.

Few delights can equal the mere presence of one whom we trust utterly .”? George MacDonald.

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