Domain registrar and web services company, GoDaddy (NYSE:GDDY) missed analysts' expectations in Q2 FY2023, with revenue up 3.21% year on year to $1.05 billion. GoDaddy made a GAAP profit of $83.1 million, down from its profit of $90.5 million in the same quarter last year.
GoDaddy (GDDY) Q2 FY2023 Highlights:
- Revenue: $1.05 billion vs analyst estimates of $1.05 billion (0.61% miss)
- EPS: $0.54 vs analyst expectations of $0.56 (4.25% miss)
- Revenue Guidance for Q3 2023 is $1.07 billion at the midpoint, below analyst estimates of $1.09 billion
- Free Cash Flow of $185.4 million, down 25.1% from the previous quarter
- Gross Margin (GAAP): 62.9%, down from 64.5% in the same quarter last year
Founded by Bob Parsons after selling his first company to Intuit, GoDaddy (NYSE:GDDY) provides small and mid-sized businesses with the ability to buy a web domain and tools to create and manage a website.
Successfully setting up an online store is difficult for most small business owners. GoDaddy offers most of the e-commerce functionalities to simplify the entire process of starting and maintaining an online business.
By making it easy for even non-technical users to set up a fully functioning website within a short period, GoDaddy helps its customers to focus their time on their primary business function.
For example, you don’t need computers to make food, however, restaurants rely on computers and websites to sell and deliver food to customers. For a small restaurant business, GoDaddy starts by providing a fitting domain name. It then provides all the tools to host, build, and manage a website. It also integrates with third-party applications to provide payment, marketing, and other e-commerce features.
GoDaddy was founded when the sale and management of domain names were popular and lucrative. As more companies moved into the domain name business, GoDaddy expanded into the e-commerce space by offering more robust website services to stay competitive.
While e-commerce has been around for over two decades and enjoyed meaningful growth, its overall penetration of retail still remains low. Only around $1 in every $5 spent on retail purchases comes from digital orders, leaving over 80% of the retail market still ripe for online disruption. It is these large swathes of the retail where e-commerce has not yet taken hold that drives the demand for various e-commerce software solutions.
GoDaddy faces competition from Automattic, Shopify (NYSE: SHOP), Squarespace (NYSE: SQSP), and Wix (NASDAQ: WIX).
Sales Growth
As you can see below, GoDaddy's revenue growth has been unremarkable over the last two years, growing from $931.3 million in Q2 FY2021 to $1.05 billion this quarter.
GoDaddy's quarterly revenue was only up 3.21% year on year, which might disappoint some shareholders. However, its revenue increased $12.1 million quarter on quarter, a strong improvement from the $3.9 million decrease in Q1 2023. This is a sign of acceleration of growth and very nice to see indeed.
Next quarter's guidance suggests that GoDaddy is expecting revenue to grow 3.08% year on year to $1.07 billion, slowing down from the 7.18% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 6.82% over the next 12 months.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. GoDaddy's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 62.9% in Q2.
That means that for every $1 in revenue the company had $0.63 left to spend on developing new products, sales and marketing, and general administrative overhead. GoDaddy's gross margin is poor for a SaaS business and we'd like to see it start improving.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. GoDaddy's free cash flow came in at $185.4 million in Q2, down 20.4% year on year.
GoDaddy has generated $920.4 million in free cash flow over the last 12 months, an impressive 22.2% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from GoDaddy's Q2 Results
Sporting a market capitalization of $11.6 billion, more than $582.6 million in cash on hand, and positive free cash flow over the last 12 months, we believe that GoDaddy is attractively positioned to invest in growth.
We struggled to find many strong positives in these results. On the other hand, its underwhelming revenue guidance for next quarter was disappointing. Within the quarter, GoDaddy missed Wall Street's revenue and normalized EBITDA expectations. Overall, the results could have been better. The company is down 7.55% on the results and currently trades at $70 per share.
Is Now The Time?
GoDaddy may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. We cheer for everyone who's making the lives of others easier through technology but in case of GoDaddy, we'll be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. And while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately gross margins show its business model is much less lucrative than the best software businesses.
GoDaddy's price to sales ratio based on the next 12 months is 2.6x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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