2023-10-04 09:34:14 ET
Summary
- Squarespace is a website design platform known for its user-friendly tools and visually appealing web designs.
- While the stock's valuation is reasonable, there are some noteworthy concerns worth considering.
- Despite concerns about consumption-based pricing models and a flattening unique subscription rate, Squarespace's strong free cash flow generation and reasonable valuation make it an attractive option for investors.
Investment Thesis
Squarespace ( SQSP ) is a website design platform that empowers entrepreneurs and businesses to create an online presence through user-friendly tools and exceptionally attractive web designs.
The business is not expensively priced at approximately 16x forward "clean" free cash flow. However, this bull case also has some noteworthy detractions that worthwhile considering.
Overall, despite pointing out a few minor drawbacks, I'm positive on this stock.
Squarespace's Near-Term Prospects
Squarespace offers a comprehensive suite of tools to empower businesses to establish a prominent online presence and conduct successful transactions on the internet.
Their offerings encompass various aspects of online operations, from website creation and design to marketing and social media management.
Squarespace's versatile commerce solutions cater to diverse needs, allowing users to sell digital content, classes, physical goods, and more.
Their focus on intuitive user experiences, consistent brand representation, and design-centric templates ensures that customers can craft unique and visually appealing websites. Indeed, if I were to argue what makes Squarespace different from its many competitors, it would be their focus on making their websites visually stunning.
In the near term, Squarespace's prospects are marked by strategic product developments aimed at improving user experiences and expanding its offerings. In fact, they are set to relaunch Squarespace Domains following the acquisition of Google Domains assets, which will enhance domain management capabilities and offer more versatility to users. In parallel, Squarespace Payments, an integrated payment processing solution, is in the works to streamline e-commerce transactions effectively.
Evidently, product enhancements are on the horizon, for example, the imminent Squarespace Refresh Product Event is expected to deliver significant updates.
Next, their ongoing integration of generative AI technology into the content management system will facilitate more efficient text generation and editing for users.
Also, the rebranding of Acuity Scheduling underscores their commitment to providing a seamless scheduling and appointment booking experience. Further, they are exploring pricing strategies, such as usage-based pricing and this gets to our first detraction from the bull case.
Personally, I'm not positively inclined towards businesses that change over to consumption-based models. This puts the focus on leaving customers with a bill, rather than seeking ways of growing its user base. Simply put, this changes the company's incentives.
Along these lines, it appears that unique subscription increases have flattened out. Indeed, from Q1 into Q2 the number of unique subscriptions saw flat growth (data not shown above) and stayed at 4.3 million.
Given this context, let's now discuss its financials.
Revenue Growth Rates Are Maturing
Squarespace operates in a competitive landscape within the website design industry. Some of its competitors include WordPress, Wix ( WIX ), and Shopify ( SHOP ).
For the average user, distinguishing between Squarespace and its competitors can be challenging because they offer largely similar core functionalities. Inasmuch as these platforms aim to provide user-friendly tools for online presence creation. Therefore, for users who have basic website needs, the differences seem minimal. Therefore, in this competitive landscape, price becomes a significant factor in decision-making.
And this circles back to our earlier consideration. If the business is seeing its unique subscription rate flatten out and to grow its revenues Squarespace is seeking to adopt a consumption-based model, this will in time end up lending itself to users churning out as they seek cheaper alternatives.
Another Detraction To Think About
SQSP Q2 2023
Throughout its shareholder letters, Squarespace makes references to its unlevered free cash flows. This means that "if we pretend" the business isn't leveraged, this is what its free cash flows would have been if ignored its interest payments on its debt.
The reason why Squarespace focuses on this metric is to give investors a sense of what the business could be reporting if it didn't have much debt on its balance sheet. While I recognize the merits of this approach and indeed argue that this business is highly free cash flow generative, as I did in my previous bullish analysis , the fact of the matter is that interest rates appear to be staying higher for longer.
Consequently, I don't believe it makes sense to ignore the fact that Squarespace carries nearly $500 million worth of debt on its balance sheet. Even if we take into account the cash on its balance sheet, its net debt position is around $220 million.
To be clear, this isn't a dealbreaker, but rather yet another pesky detraction that I believe is worth noting. After all, Squarespace is on a path to make around $200 million of "clean" free cash flow, meaning that if it so wished, it could pay back nearly all its debt within a year.
And if we presume that its "clean" free cash flow grows by around 20% next year, this would leave the stock priced at around 16x next year's free cash flow, a multiple that I believe is both fair and attractive for investors in the name.
The Bottom Line
In summary, Squarespace is a website design platform known for its user-friendly tools and visually appealing web designs. While the stock's valuation is reasonable, there are some noteworthy concerns worth considering. Despite these minor drawbacks, my overall sentiment toward the stock is positive.
Squarespace offers a wide range of tools for establishing a robust online presence, from website creation to marketing and e-commerce solutions. Their focus on creating visually stunning websites sets them apart from competitors. In the near term, Squarespace's prospects include strategic product developments like the relaunch of Squarespace Domains and the integration of Squarespace Payments. They are also incorporating generative AI technology into their content management system for more efficient text generation and editing. However, their exploration of consumption-based pricing models and a flattening unique subscription rate raise some concerns.
Furthermore, Squarespace carries a significant amount of debt on its balance sheet, which, while not a deal-breaker, is worth noting given the current interest rate environment. Despite these concerns, Squarespace's strong free cash flow generation and reasonable valuation make it an attractive option for investors.
For further details see:
Squarespace's Business Model: Pros And Cons