2023-08-30 12:37:50 ET
Summary
- Squarespace, Inc. reported Q2 2023 financial results, beating revenue but missing EPS estimates.
- The company provides web hosting services for small businesses globally.
- The global web hosting services market is expected to reach $396 billion by 2030, driving growth for Squarespace and its competitors.
- While international markets may provide a revenue boost over priors, the stock may be fully valued at around $30.00, so I'm Neutral [Hold] on Squarespace for the near term.
A Quick Take On Squarespace
Squarespace, Inc. ( SQSP ) reported its Q2 2023 financial results on August 8, 2023, beating revenue but missing EPS consensus estimates.
The firm provides a suite of web hosting services for small businesses worldwide.
I previously wrote about SQSP with a Hold outlook.
Given macroeconomic questions and a potentially full valuation at present cash flow levels, my near-term outlook for Squarespace, Inc. is Neutral [Hold], although it is worth putting on a watch list for further consideration.
Squarespace Overview And Market
New York, NY-based Squarespace provides a range of website hosting and related services to individuals, small businesses and organizations around the world.
The firm is led by founder and CEO Anthony Casalena, who graduated from the University of Maryland with a B.S. in computer science.
The company’s primary offerings include:
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Website creation
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Domain name
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Marketing
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Ecommerce
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Unfold social media
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Scheduling.
Squarespace markets its services to consumers and small business owners via social media platforms, digital media efforts, referrals and SEO.
Squarespace’s Market & Competition
According to a 2023 market research report by Fortune Business Insights, the global market for web hosting services was an estimated $94.6 billion in 2022 and is forecast to reach $396 billion by 2030.
This represents a forecast strong CAGR of 20.3% from 2023 to 2030.
The main drivers for this expected growth are the recent pandemic, which forced businesses to adopt an online presence and consumers seeking more information and functionality from businesses digitally.
Major competitive or other industry participants include:
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Wix
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Automattic
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Shopify
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Weebly
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GoDaddy
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BigCommerce
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MailChimp
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Mindbody
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Others.
Squarespace’s Recent Financial Trends
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Total revenue by quarter has grown steadily in recent quarters; Operating income by quarter has turned up more recently:
Total Revenue and Operating Income (Seeking Alpha)
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Gross profit margin by quarter has trended lower in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter have also fallen somewhat:
Gross Profit Margin and Selling, G&A % Of Revenue (Seeking Alpha)
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Earnings per share (Diluted) have fluctuated significantly in recent quarters:
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP.)
In the past 12 months, SQSP’s stock price has risen 44.36% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 24.85%:
52-Week Stock Price Comparison (Seeking Alpha)
For the balance sheet , the firm ended the quarter with $274.0 million in cash and equivalents and $494.0 million in total debt, of which $40.4 million was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was an impressive $184.2 million, during which capital expenditures were $13.0 million. The company paid $103.2 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For Squarespace
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 4.6 |
Enterprise Value / EBITDA | 41.4 |
Price / Sales | 4.3 |
Revenue Growth Rate | 12.3% |
Net Income Margin | -23.6% |
EBITDA % | 11.2% |
Market Capitalization | $3,970,000,000 |
Enterprise Value | $4,310,000,000 |
Operating Cash Flow | $197,240,000 |
Earnings Per Share (Fully Diluted) | -$1.62 |
(Source - Seeking Alpha.)
As a reference, a relevant partial public comparable would be GoDaddy Inc. ( GDDY ); shown below is a comparison of their primary valuation metrics:
Financial Metric Comparison (Seeking Alpha)
SQSP’s most recent unadjusted Rule of 40 calculation was 23.5% as of Q2 2023’s financial results, so the firm has improved its performance in this regard:
Rule of 40 Performance (Unadjusted) | Q3 2022 | Q2 2023 |
Revenue Growth % | 14.4% | 12.3% |
EBITDA % | 4.2% | 11.2% |
Total | 18.6% | 23.5% |
(Source - Seeking Alpha.)
Sentiment Analysis
I’ve prepared a word count sentiment analysis of management’s most recent earnings call:
Earnings Transcript Key Terms Frequency (Seeking Alpha)
The chart above shows fairly positive sentiment, with the exception of the four mentions of the word "Macro."
Analysts questioned management about the impact of the macroeconomic environment on the company.
Leadership indicated some positive effects from its international operations amid a more favorable environment than in the U.S. but was not specific enough to provide any additional details.
Traffic to the firm’s website has dropped off in recent weeks, a nearly 34% drop from its recent high in July, as the one-year chart shows below:
Organic Traffic History (SEMRush)
Commentary On Squarespace
In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results , management highlighted the positive impact of pricing increases passed through to "legacy customers," which contributed to the firm’s revenue growth results.
Notably, the company is seeing increasing ARPU (Average Revenue Per User) due to customers choosing higher-priced plans. ARPU grew by 7% YoY to reach $219.
The firm also produced strong international revenue growth results and expects to lap previously high Forex headwinds later in the year, potentially setting up the company for a strong beat in this regard.
Management didn’t disclose any company, customer or revenue retention rate metrics but did say that customer retention ‘outpaced our expectations.’
Total revenue for Q2 2023 rose 16.4% year-over-year and gross profit margin was unchanged over the same period.
Selling and G&A expenses as a percentage of revenue dropped 7.8% YoY, indicating improved efficiency in generating incremental revenue and operating income rose impressively to $36.7 million.
The company's financial position is reasonably strong, with ample liquidity, $494 million in total debt, but very impressive free cash flow.
SQSP’s Rule of 40 performance has improved somewhat versus Q3 2022 but is still only moderate and in need of improvement.
Looking ahead, consensus full-year 2023 revenue estimates are $994.4 million, or a 14.7% growth rate over 2022.
If the company achieves this expected growth, this would represent an increase in revenue growth rate versus 2022’s growth rate of 10.59% versus 2021.
Regarding valuation, my discounted cash flow calculation, based on $1.33 per share in free cash flow over the past twelve months, indicates the stock may be fully valued at its current price level:
Discounted Cash Flow Calculation - Squarespace (GuruFocus)
A potential upside catalyst to the stock could include better-than-expected revenue contribution from international markets.
However, given uncertainties in macroeconomic conditions and the apparently full valuation at present cash flow levels, my near-term outlook for Squarespace, Inc. is Neutral [Hold], although it is worth putting on a watch list for further consideration.
For further details see:
Squarespace Grows But Valuation May Be Full Here