2023-06-22 14:22:55 ET
Summary
- Squarespace has an attractive valuation with steady mid-teens growth rates.
- User-friendly tools empowering individuals and businesses to create, optimize, and sell online.
- Consistent revenue growth in the mid-teens, driven by a loyal customer base and reliance on pricing strategies.
- One blemish: sequential slowdown in subscription growth is a risk to monitor.
Investment Thesis
Squarespace ( SQSP ) is growing at a reasonable rate and taking market share in the sector. The investment thesis is not without blemishes and I highlight this in the analysis that follows.
But the key takeaway is that paying around 22x this year's free cash flow is an attractive valuation for a business that's ultimately growing in the mid-teens.
Rapid Recall
Squarespace provides user-friendly tools for individuals and businesses to create and optimize their online presence, including websites, domains, e-commerce solutions, and analytics.
Also, Squarespace's commerce solutions enable the sale of various digital and physical goods, as well as services such as classes, appointments, and reservations.
I concluded my previous analysis on the back of its Q4 earnings by saying :
Squarespace, Inc. is finally showing some promise. SQSP stock is reasonably valued. There are some minor blemishes in this report, but overall, given that the stock hasn't gone anywhere in one year, I believe investors will be keen to send Squarespace, Inc. share prices higher.
It's been a few months since I wrote those lines and since then the share price has been bumpy, but nevertheless, it has beaten the S&P500 ( SPY ) by some distance.
Author's work on SQSP
So what's next?
Revenue Growth Rates Growing in the Mid-Teens
Let's get right to the heart of the matter, Squarespace today is no longer a fast-growing business. In the best-case scenario, Square is growing at around the mid-teen range.
The business that prides itself in offering its users a design-centric approach, with visually stunning templates and a focus on aesthetics, believes that it can continue raising prices on its customers and that its loyal customer base will not churn out. Or at least won't meaningfully churn out.
Here's a quote from its earnings call echoing that insight,
Now as we conclude our second full quarter of realizing these updated prices in our base, customer cohorts demonstrate strong cash retention and lower customer churn than our projections. Our largest cohorts of legacy customers renewed in the first quarter, and renewal rates were in line with historic levels.
Profitability Profile Continues to Improve
At the end of Q4, Squarespace's guidance for 2023 was for free cash flow margins of just under 18% . Then, together with its Q1 results, Squarespace upwardly revised its free cash flow outlook for 2023 to slightly above 18%.
Astute readers will have noticed in my introduction, higher up, I remarked that there was a blemish in the previous report.
I made the argument at the time of my previous analysis that I wasn't particularly enchanted with Squarespace's SBC expense outpacing its topline growth.
With this context in mind, consider the following:
What you see above is that shockingly, Squarespace's stock-based compensation is actually down more than 8% y/y. While I don't expect this trend to continue, this points to terrific progress that Squarespace is able to raise its revenue growth rates for 2023, and do so, while lowering its SBC expense.
Yes, the business holds approximately $250 million of net debt. And yes, I would vastly prefer Squarespace look for ways to reignite its growth rates, rather than spending excess capital repurchasing its shares.
Particularly given that nearly half the sum that was spent to buy back shares was spent to pay the taxes on management's stock-based compensation.
But altogether, I believe that paying around 22x this year's free cash flows for Squarespace is an attractive valuation.
Are There Any Investment Risks?
Yes, there's one pesky detail that I believe warrants highlighting.
The graphic above is slightly misleading. What you see is a very strong climb up and to the right. However, I believe the key figure one should think about here is unique subscription figures rather than ARPUS. Why?
ARPUS are average revenues per subscription for the trailing twelve months divided by subscriptions in the quarter. Meaning that any price hiking is driving the ARPUS higher.
But in actuality, I argue that the key to any thriving business is the growth in users. And what you see above is that subscription growth figures are pointing to a sequential slowdown in adoption.
This does not break my bull case, but it is something for investors to remain mindful of.
The Bottom Line
Squarespace is a growing company that provides user-friendly tools for creating and optimizing online presence.
Despite not being a fast-growing business anymore, Squarespace is showing promise with revenue growth rates in the mid-teens.
The company believes it can raise prices without significant customer churn, and its profitability profile is improving.
However, there are some risks to consider, such as a sequential slowdown in subscription growth. Overall, I believe that investing in Squarespace at a valuation of around 22 times this year's free cash flows is attractive.
For further details see:
Squarespace: Unveiling The Path To Success, 22x FCF