It’s All-Go For a $4.5 Billion GoDaddy IPO

According to a report in the New York Post, it looks like GoDaddy Inc. will launch its IPO “early next year.” No doubt, the timing is certainly good for a cloud-based deal. Yet a GoDaddy IPO may face some headwinds.

First of all, let’s get a background on the company:  Founded in 1997, GoDaddy is one of the pioneers of domain registration and web hosting. To deal with the intense competition and rapid commodization, the company wisely pursued an aggressive marketing strategy, which included salacious commercials. Some of them were during the Super Bowl.

All in all, the strategy worked out pretty well. GoDaddy now has roughly 12.5 million customers and operates the world’s largest domain marketplace with about 57 million domains under management.

And yes, GoDaddy has been able to translate this into solid financials, according to documents it filed this week with the U.S. Securities and Exchange Commission. For the first nine months of this year, revenues increased by 23% to $1.02 billion and adjusted earnings before interest, taxes, depreciation and amortization(EBITDA) jumped from $155.5 million to $215.1 million.

The good news is that there is still lots of room for growth, which should help add fuel for a GoDaddy IPO. Based on data from the Small Business Administration, there are 28 million small businesses — but more than half of them do not have a website (this is according to a study from Beall Research).

Seeing a big opportunity, KKR & Co. (KKR) and Silver Lake purchased the company for about $2.25 billion back in 2011. The result was the addition of $1.1 billion of debt on the balance sheet. The private equity investors also brought on a new CEO, Scott Wagner, who took steps to prepare for a GoDaddy IPO. To this end, he changed the marketing strategy — moving away from the controversy — and also launched new services. Some include a cloud-based accounting platform as well as improved mobile features.

But then in January 2013, Blake Irving took the CEO spot. Prior to this, he was the chief product officer at Yahoo! Inc. (YHOO).

While all of this is good, the GoDaddy IPO may not necessarily be a winner. Perhaps the biggest problem is the fierce competition. Consider that recently Google Inc (GOOG) began the testing of its own domain registration service. Because of this, the industry got a big jolt, as seen with the performance of Group Inc (WWWW) and Demand Media Inc (DMD). Since June, both stocks have lost about half their value.

Going forward, there may be other biggie tech companies that could enter the market. Let’s face it, Microsoft Corporation (MSFT) could leverage its cloud platform or, Inc. (AMZN) could do so as well. Even International Business Machines Corp. (IBM) may be player a player. After all, the company recently launched a web-based email platform.

Something else: the expected valuation of a GoDaddy IPO also looks to be fairly priced – so there may not necessarily be a pop on its debut. Keep in mind that the expected multiple is about about 3.4 times sales. But here’s how this would compare with other operators:

Company Price-to-sales multiple 1.6X
Rackspace Hosting, Inc. (RAX) 3.6X
Endurance International Group Hldgs Inc (EIGI) 3.2X
Demand Media 0.3X

In other words, do not expect the GoDaddy IPO to be flashy. If anything, the long-term prospects could be tough for this company. As already seen with Demand Media and, the market can definitely  be brutal.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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