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Stock Pick For December: Semrush (NASDAQ:SEMR)


Full Report / December 03, 2021
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Started by Oleg Shchegolev (who is still the CEO) while still in university, Semrush (NYSE:SEMR) is a software as a service platform that helps companies increase their web traffic and optimize search engine and content marketing efforts.

Semrush (SEMR) Q3 FY2021 Highlights:

  • Revenue: $49.2 million vs analyst estimates of $47.4 million (3.73% beat)
  • EPS (GAAP): $0 (breakeven)
  • Revenue guidance for Q4 2021 is $52 million at the midpoint, above analyst estimates of $50.7 million
  • Free cash flow of $7.72 million, up from $468 thousand in previous quarter
  • Net Revenue Retention Rate: 124%, up from 121% previous quarter
  • Customers: 79,000, up from 76,000 in previous quarter
  • Gross Margin (GAAP): 76.9%, in line with same quarter last year


With all the social media, blogs posts, and audio and video content non stop screaming for our attention, it is becoming increasingly difficult for small and medium sized businesses to compete for the attention of their customers online.

Semrush offers a suite of tools that help companies to be found online. Users can simply insert their own or their competitor’s web domain name into the platform and immediately start seeing insights around what keywords they rank for in Google, who are the visitors and where is the traffic coming from. The tool automatically provides suggestions on how to optimize the website both from content and technical SEO perspective.

Semrush is constantly monitoring a large part of the internet and its large data set enables it to algorithmically suggest new content strategies based on popular topics and headlines or provides insights on how to optimize your online ads for better performance. The company has expanded from a pure search engine optimization product to a wide range of over 50 tools, covering everything from market research, social media, content marketing to paid online marketing. And even more impressively, Semrush is the leading tool in most of the categories it competes in.

As the share of the global population with internet connectivity grows, companies continue to rapidly increase their online presence to engage with their customers. The Covid pandemic has further accelerated this trend and drives demand for integrated tools that help companies market their products online.

Semrush competes with companies like Hubspot (NYSE:HUBS) and Yext (NYSE:YEXT), although they don't offer the same range of features.

Sales Growth

As you can see below, Semrush's revenue growth has been very impressive over the last year, growing from quarterly revenue of $32.1 million, to $49.2 million.

Semrush Total Revenue

This was another standout quarter with the revenue up a splendid 52.9% year on year. Semrush increased revenue by $4.24 million in Q3, compared to $5 million revenue add in Q2 2021, confirming a stable growth trajectory.

Analysts covering the company are expecting the revenue to grow strong 29.9% over the next twelve months.

Customer Growth

You can see below that Semrush reported 79,000 customers at the end of the quarter, an increase of 3,000 on last quarter. Semrush has been able to land big-name customers such as Salesforce (NYSE:CRM) and Walt Disney (NYSE:DIS), along with a third of the Fortune 500.

Semrush Customers

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

Semrush Net Revenue Retention Rate

Semrush's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 124% in Q3. That means even if they didn't win any new customers, Semrush would have grown its revenue 24% year on year. Significantly up from the last quarter, this an excellent retention rate for a company targeting small and medium sized businesses and a proof that Semrush's customers are satisfied with their software, are using it more and are getting more value from it over time. That is good to see.

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. Semrush's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 76.9% in Q3.

Semrush Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a good gross margin that allows companies like Semrush to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Semrush is doing a good job controlling costs and is not under pressure from competition to lower prices.

Key Takeaways from Semrush's Q3 Results

With a market capitalization of $2.75 billion, Semrush is still a small company. But with its more than $180 million in cash, no debt and free cash flow over the last twelve months being positive, the company is in a very strong position to invest for growth.

We were impressed by the exceptional revenue growth Semrush delivered this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Overall, this quarter's results seemed positive, confirmed the company is staying on track and shareholders can feel optimistic. The company currently trades at $19.62 per share.

Is Now The Time?

When considering Semrush, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Semrush is a great business. While we would expect growth rates to somewhat moderate from here, its revenue growth has been exceptional, over the last two years. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its strong gross margins suggest it can operate profitably and sustainably.

Semrush's price to sales ratio based on the next twelve months is 12.1x, a significantly lower multiple relative to the hottest tech stocks as the stock is still relatively unknown. Looking at the tech landscape today, Semrush's qualities as a business really stand out and we like the look of the company at current prices, especially considering it is down more than 30% from its all time highs due to the recent volatility.

The Wall St analysts covering the company have a one year price target of $25.2 per share right before these results, implying that they see upside in buying Semrush even in the short term.

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