The news looks good all around for Godaddy Inc (NYSE:GDDY). The GDDY stock price is at an all-time high after a 10%+ earnings-driven gain Friday. GoDaddy stock has gained 22% this year and has tripled from its $20 price at the time of its March 2015 IPO.
Growth looks impressive as well. Revenue is climbing nicely, thanks to both organic growth and acquisitions. Margins are expanding at the same time. Just looking at the numbers, the impressive run in GoDaddy stock makes some sense.
But there’s reason for caution as well. GDDY is starting to look awfully expensive. Debt isn’t unmanageable, but GoDaddy does have a good deal of leverage which helps the stock on the way up — and could hurt it on the way down.
Meanwhile, competition is intense, which could pressure revenue growth and pricing going forward. GoDaddy looks like a good business at the moment, and it is. I’m just not sure it’s quite this good.
Fundamentally, there’s nothing wrong with GoDaddy’s report on Thursday. Q4 revenue of $602 million beat analyst expectations and rose 24% year-over-year. Bookings were a point stronger. Unlevered free cash flow (FCF) increased 43%.
For the full year, GoDaddy’s top line rose 21%, as did bookings (which exclude changes in deferred revenue and net refunds). Last year’s acquisition of Host Europe Group helped, but per the Q4 conference call, organic growth was 12%.
2018 guidance of roughly $2.6 billion implies 16%-17% growth and a similar organic performance this year, but off a bigger base, as CFO Ray Winborne pointed out.
Unlevered FCF climbed 38.9% for the year, with margins rising to a healthy 22.2%. Guidance suggests further margin expansion in 2018, with the FCF figure projected to increase 22-26% YOY.
The numbers across the board seem to support the growth story here. And with GoDaddy stock up over 30% just since early December, investors clearly are willing to pay a growth multiple for the stock.
Is Competition a Risk for GoDaddy Stock?
Again, the growth is impressive. But there are risks — most notably competition. Though GoDaddy is taking share from stagnant rival Web.com Group Inc. (NASDAQ:WEB), Wix.Com Ltd (NASDAQ:WIX) is posting even better growth than GoDaddy.
Meanwhile, efforts from companies like Shopify Inc (NYSE:SHOP) potentially could pressure some of GoDaddy’s premium services that are boosting revenue growth and margins. GoDaddy has been a winner in DIY (do it yourself), but DIFM (do it for me) clearly is gaining interest from customers, based on results at Wix.com and Shopify, among others.
Whether it’s hosting, security, or the company’s reselling of Office 365 from Microsoft Corporation (NASDAQ:MSFT), premium services are a big driver here. The actual domain business is relatively low-margin. GoDaddy needs those premium services to keep its growth intact.
GoDaddy is doing well, admittedly. The Host Europe Group acquisition expands its footprint. The company just launched integrations into the Facebook, Inc. (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL) platforms to boost social marketing capabilities for its customers.
Another acquisition, Main Street Hub, should help in the DIFM area as well. And GoDaddy said on the Q4 call that it was looking at “a multi-year transition to the cloud,” which could open new market opportunities.
But given the valuation of GoDaddy stock, the company will need to be very successful. Because GDDY isn’t cheap.
The GDDY Stock Price Looks a Little High
The average analyst target price for GDDY heading into earnings was a bit over $54. That no doubt will rise. B. Riley, for instance, hiked its fair-value estimate to $65 after the quarter.
But at these levels, GoDaddy’s market cap is approaching $11 billion, with another $1.9 billion in net debt. Unlevered FCF figures sound reasonable. Even adding back a likely ~$100 million in interest expense, GDDY still trades at about 21x 2018 free cash flow.
That figure, though, includes the benefit from deferred revenue: cash paid upfront for services delivered over time. That’s a benefit at the moment, but it’s also a benefit that will fade as growth decelerates. And on an earnings basis, GoDaddy looks rather expensive. GAAP EBITDA for the year was about $270 million, implying about a 47x trailing multiple.
On both counts, GoDaddy is pricing in a lot of growth. The good news is that it’s delivering a lot of growth. The question going forward is: How long can that can last?
As of this writing, Vince Martin has no positions in any securities mentioned.