Similarweb: Rating Upgrade Fueled By Improved Revenue Retention

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Upgrading Similarweb to ‘Buy’ due to improved revenue quality, net revenue retention, and margin profile, despite competitive pressures and modest revenue growth.Similarweb’s operating expenses have ...

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Richard Drury I have covered Similarweb (NYSE:SMWB) on one previous occasion, just over six months ago: Similarweb: Slowing Growth And Slumping Revenue Retention At the time, Similarweb’s stock was trading for around $9 per share. As part of my analysis, I recommended a ‘Hold’ rating for Similarweb. Factors that contributed to my rating included their slowing growth, slumping net revenue retention, and appropriate valuation relative to competitors like Semrush (SEMR). Following the publication of my analysis, Similarweb’s stock trended downward before recovering in August and September. Shares are currently trading for around $8.50. I wanted to revisit Similarweb to address any changes to their business, financial performance, and future outlook. Additionally, I noticed that Seeking Alpha’s quant system had recently rated Similarweb as a ‘Strong Buy,’ leading me to investigate further. As part of my analysis today, I am upgrading my rating for Similarweb to a ‘Buy,’ primarily due to their enhanced revenue quality, net revenue retention, and margin profile. As a reminder, Similarweb is the developer of software that provides customers digital intelligence solutions. Their solutions allow customers to monitor online traffic trends, research competitors, generate leads, and research stocks, among others. Their primary customer profiles include agencies, consultancies, hedge funds, investment banks, venture capital firms, etc. Financials Similarweb has generated $231.2 million of revenue over the last four quarters. Of that total revenue, $60.6 million came from Q2. This is about 13% higher than their Q2 2023 revenue of $53.7 million. Data by YCharts Although 13% revenue growth may sound modest for a software company that went public within the last few years, it is a step in the right direction for Similarweb. After their Q3 2023 year-over-year revenue growth reached a low of 9.6%, Similarweb has since put together three consecutive quarters of improved revenue growth. Still, I am puzzled that Similarweb’s revenue growth hasn’t been higher. For context, according to their latest investor presentation, Similarweb estimates their total addressable market at $52 billion.   Similarweb Q2 2024 Investor Presentation Sure, it’s commonplace for executives to grossly overinflate their market size in hopes of exciting investors. But, even if this were a gross overestimation and their TAM was only half that size, I’m still surprised that Similarweb is already seeing stunted revenue growth. When this is the case, I am led to believe that there is a deficiency in their product. Or, at the very least, a competitor has a superior product. Regardless, as mentioned above, Similarweb’s revenue growth is once again trending in the right direction. The company’s gross margin also expanded in Q2 to 79.4%. Although this isn’t their highest gross margin ever, which came in Q3 2023, it is over 230 basis points higher than it was a year prior. This same trend of margin expansion continued over into Similarweb’s operating margin, as they posted their narrowest operating loss since they went public. In Q2, the company posted an operating loss of $0.4 million. Over the last four quarters, Similarweb’s cumulative operating loss is $9.5 million. It’s also worth pointing out that Similarweb has stabilized their operating expenses. The company’s total operating expenses over the last four quarters have been $49 million, $46.5 million, $48.7 million, and $48.5 million. Similarweb’s Q2 operating expenses were 4.3% lower than they were a year ago. Data by YCharts Similarweb’s ability to rein in their costs is a positive sign to me. As I mentioned in my previous analysis, doing so, in many ways, is waving the white flag on their historical growth at all costs approach. Instead, they are opting for a measured, sustainable approach to the future of their company. Doing so signals that Similarweb has started the next stage of their company’s life cycle. On a cash-basis, Similarweb’s outlook is also improving. In Q2, they generated $7.3 million of cash from operations. This marks their third consecutive quarter with positive cash generated from operations. Over the last year, they’re cumulative cash generated from operations is $16.4 million. Looking ahead, Similarweb’s management is continuing to fixate on the company’s cash generation. In their investor presentation, they shared their long-term financial model complete with targets ranging from gross margins to free cash flow margins.   Similarweb Q2 2024 Investor Presentation In their model, they set their target free cash flow margin at 30%. While this is ambitious, I believe it’s achievable. Of the assumptions that need to be true to reach this target, I believe that their target gross margin of 85% will be the most difficult to accomplish. I’m hesitant to believe that they’ll be able to expand their gross margins solely from increasing efficiency. Rather, I believe the majority of their desired gross margin expansion will have to come from price increases. And considering their stunted revenue growth, which may be signaling increasing competitive pressures, this may be easier said than done. As of Q2, Similarweb had $61.8 million of total cash and short-term investments on their balance sheet. This is a healthy amount for a company with a market cap just shy of $700 million–especially considering that they are now cash flow positive. Moreover, Similarweb only has $39.7 million of debt. Given their recent financial performance, their balance sheet is strong. Overall, Similarweb’s financials paint an improving picture. Their revenue growth has begun trending in the correct direction again, management has effectively put a leash on their operating expenses, and they are no longer burning cash. Revenue Retention Another positive development in recent quarters for Similarweb is their improved revenue retention metrics. In my previous analysis, I noted that the company’s net revenue retention had been trending down–causing concern that no floor was in sight. However, Q2 was a step in the right direction for Similarweb. In Q2, Similarweb posted net revenue retention of 99%. Although this is still lower than investors may have hoped for, it is up from the 98% net revenue retention that Similarweb posted in the two prior quarters.   Similarweb Q2 2024 Investor Presentation And considering that net revenue retention is a key factor that influences valuation multiples–particularly for software companies–Similarweb’s net revenue retention is taking another step in the right direction. Bull Case As I see it, the bull case for Similarweb revolves around their ability to continue to bolster their net revenue retention. Why? I believe their competitor, Semrush can offer an answer. In Q2 2024, Semrush reported net revenue retention of 107%, or about 8% higher than that of Similarweb. At the same time, according to their investor presentation, Similarweb’s net revenue retention for customers that generate over $100k in ARR is 109%. Not only that, but Similarweb’s revenue makeup has been rapidly shifting towards these larger enterprise customers with higher revenue quality. As this shift continues, Similarweb’s overall net revenue retention will rise. At the moment, Semrush is trading at a trailing EV/Revenue multiple of 5.5x, and a forward multiple of 5x. On the other side of the coin, Similarweb trades for 2.9x trailing EV/Revenue, and 2.7x forward.   Seeking Alpha Sure, Semrush has higher projected revenue growth and a higher magnitude of total revenue, but I’d argue that Semrush is simply just a couple of years ahead of Similarweb in terms of their company’s life cycle. In all, I believe it’d be quite reasonable for Similarweb to trade for an EV/Revenue multiple similar to what Semrush trades for today (~5x) within the next couple of years–particularly as Similarweb continues to bolster their revenue quality with higher-ticket, higher-retention customers. To add more gas to the fire, individuals and insiders own over 25% of Similarweb’s shares. This amounts to over $175 million of market value. While a couple hundred million dollars of market value may seem inconsequential in the grand scheme of the stock market, it’s still a healthy sum that’s more than enough to motivate insiders. Risks In my last analysis, I highlighted Similarweb’s then-slumping net revenue retention as their primary risk. However, at least for the time being, that risk has been addressed. Now, I believe that competitive pressures pose the primary risk for the company. As I’ve mentioned earlier, I’m cautious regarding Similarweb’s revenue growth rate. They went from over 40% year-over-year revenue growth to just over 10% year-over-year revenue growth in less than two years. While it’s easy to point fingers at negative factors such as the macro environment in the short term, there’s only so much that you can blame in the long-term before you need to honestly evaluate your own offering to the market–particularly when your current revenue pales in comparison to your market size. In essence, I’m concerned that Similarweb’s stunted revenue growth is a sign that they are being out-competed by their rivals, including Semrush. I advise that investors continue to monitor Similarweb’s ability to grow top-line revenue, while also factoring in what competitors such as Semrush are able to achieve. Conclusion  All in all, Similarweb has put together a couple of encouraging quarters since my last analysis. They’ve made notable strides in enhancing their revenue quality, net revenue retention, and margin profile. Furthermore, they have put together three consecutive quarters of positive cash generation from operations and are no longer burning cash. As these trends continue to take root, Similarweb has a path to multiple expansion. For these reasons, among others, I am upgrading my rating for Similarweb to ‘Buy.’","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2473150067"}