High Multiples and Lack of Moat Make Godaddy Inc a Stock to Avoid

GoDaddy stock - High Multiples and Lack of Moat Make Godaddy Inc a Stock to Avoid

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Godaddy Inc (NYSE:GDDY) continues on the path to growth. Since its IPO in 2015, GoDaddy stock has enjoyed steady price growth. Investors keep moving into the stock as revenues continue experiencing double-digit increases.

However, the nature of the company’s business forces margins to low levels in a market offering multiple alternatives. Given its modest competitive advantage, investors should avoid paying high multiples for GDDY stock.

Provocative Ads Bring Growth to GoDaddy Stock

The Scottsdale, Arizona-based cloud and business service company found its way into the public eye through memorable and, sometimes, off-color ads. Although this marketing strategy has received much criticism, it also tends to lead to a surge in web traffic and domain registrations.

However, despite the playful nature of the ads, GoDaddy runs a successful business that has enjoyed high growth. This is reflected in the stock price. Long a private company, GoDaddy went public in 2015. Since that time, GoDaddy stock has enjoyed a gradual, steady uptrend with only modest pullbacks.

Today, GDDY stock trades just below the all-time highs it hit in early March. Although the stock price has paused over the last month, pricing appears strong, and the good news continues. After several years of losses, GDDY finally turned a profit in fiscal 2017, earning 32 cents per share. Analysts expect 42 cents per share for fiscal 2018 and 88 cents per share net income the year after.

A long record of impressive growth has made this possible. Domain revenue accounts for just under half of the company’s cash intake. Though this has become its slowest-growing segment, revenues still grew by 16.1%. Its Hosting and Presence division makes up about 38% of revenues, but it grew by 29.5% in the same period. Business Applications, though a much smaller portion of the company, increased revenues by 37.6%. The company also issued full-year guidance, forecasting 16% revenue growth for 2018.

GoDaddy Stock Supports a No-Moat Business

Still, GoDaddy stock trades at an expensive 85 times earnings. If consensus estimates hold up, profits will make this valuation fair within a few years. Our own Vince Martin touched on the problem of increasing competition. However, that’s only a problem because of a problem that hurts many stocks in this area — the lack of a moat.

GoDaddy’s name recognition and integrations with the likes of Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) create slight advantages. Domains, its largest source of revenue, have become a low-margin business with literally thousands of competitors. Hosting services are also a dime a dozen. Both of those services account for more than 80% of company revenues. And as my colleague mentioned, the Business Applications division faces threats from the likes of Wix.com Ltd (NASDAQ:WIX) and Shopify Inc (NYSE:SHOP).

If GoDaddy keeps prices competitive, name recognition will keep many prospective competitors at bay. The problem for investors is that low pricing usually meaning low margins. Hence, the company must continue to attract growth, growth that other companies could cut into at any time. GoDaddy stock may continue its growth, but I cannot justify paying 85 times earnings for a no-moat business.

Final thoughts on GoDaddy stock

GoDaddy stock remains too vulnerable to sustain high price-to-earnings ratios in the long run.

The firm has attracted the attention of the country through its provocative ads and celebrity endorsements. This has resulted in double-digit revenue growth and, recently, positive earnings. However, all of its segments operate in areas that have attracted numerous competitors. Moreover, stock price increases took the PE ratio above 85 times earnings.

Given the high valuation in a no-moat business, investors should look elsewhere for gains.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/high-multiples-lack-moat-godaddy-gddy-stock-avoid/.

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