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GoDaddy (NYSE:GDDY) Exceeds Q2 Expectations But Quarterly Guidance Underwhelms


Full Report / August 04, 2021
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Domain registrar and web services company, GoDaddy (NYSE:GDDY) reported Q2 FY2021 results beating Wall St's expectations, with revenue up 15.4% year on year to $931.3 million. GoDaddy made a GAAP profit of $46.9 million, improving on its loss of $673.2 million, in the same quarter last year.

GoDaddy (GDDY) Q2 FY2021 Highlights:

  • Revenue: $931.3 million vs analyst estimates of $920.2 million (1.19% beat)
  • EPS (GAAP): $0.27
  • Revenue guidance for Q3 2021 is $945 million at the midpoint, below analyst estimates of $948.5 million
  • The company reconfirmed revenue guidance for the full year, at $3.75 billion at the midpoint
  • Free cash flow of $237 million, down 11.6% from previous quarter
  • Gross Margin (GAAP): 64.3%, in line with previous quarter

Founded in 1997, 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.

As more businesses come online and the volume of digital transactions accelerate, the demand for no-code and low-code web making tools is expected to remain strong.

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 solid over the last year, growing from quarterly revenue of $806.4 million, to $931.3 million.

GoDaddy Total Revenue

This quarter, GoDaddy's quarterly revenue was once again up 15.4% year on year. We can see that revenue increased by $30.2 million in Q2, up on $27.2 million in Q1 2021. While we've no doubt some investors are looking for higher growth, it's good to see that quarterly revenue growth is accelerating.

Analysts covering the company are expecting the revenues to grow 10.6% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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 is left after paying for servers, licences, technical support and other necessary running expenses was at 64.3% in Q2.

GoDaddy Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.64 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and we would like to see it start improving.

Key Takeaways from GoDaddy's Q2 Results

With market capitalisation of $14.1 billion, more than $1.37 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

GoDaddy topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, it was less good to see that revenue growth is now a bit weaker and the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is flat on the results and currently trades at $83.5 per share.

Is Now The Time?

When considering GoDaddy, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of GoDaddy we will be cheering from the sidelines. Its revenue growth has been weak. And while its bountiful generation of free cash flow empowers it to invest in growth initiatives, 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 twelve months is 3.6, 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.