Similarweb: Rating Downgrade As Upside Is Not Attractive Anymore

seekingalpha11-23

Downgrade from buy to hold due to valuation; recommend locking in gains (~69% over 4 months) as upside is now limited.3Q24 earnings: 18% revenue growth, 470 bps adj EBIT margin expansion, adj EPS of $...

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recommend locking in gains (~69% over 4 months) as upside is now limited.3Q24 earnings: 18% revenue growth, 470 bps adj EBIT margin expansion, adj EPS of $...</p>\n\n<a href=\"https://seekingalpha.com/article/4739747-similarweb-rating-downgrade-as-upside-is-not-attractive-anymore\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"SMWB","symbol_name":"Similarweb Ltd.","start_time":0,"source_url":"https://seekingalpha.com/article/4739747-similarweb-rating-downgrade-as-upside-is-not-attractive-anymore","article_id":"2485245796","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/551986071/image_551986071.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2485245796","pubTimestamp":1732317694,"columns":[],"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Downgrade from buy to hold due to valuation; recommend locking in gains (~69% over 4 months) as upside is now limited.3Q24 earnings: 18% revenue growth, 470 bps adj EBIT margin expansion, adj EPS of $","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["rate"],"viewcount":null,"language":"en","relate_stocks":{"SMWB":"Similarweb Ltd."},"translate_title":"Similarweb：评级下调，因为上涨空间不再有吸引力","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SMWB":0.9},"content_text":"Downgrade from buy to hold due to valuation; recommend locking in gains (~69% over 4 months) as upside is now limited.3Q24 earnings: 18% revenue growth, 470 bps adj EBIT margin expansion, adj EPS of $0.05, beating estimates.Fundamentals strong: 101% net retention rate, focus on large enterprise accounts, and multiyear deals driving revenue visibility.Promising AI growth: SMWB's data used for AI model training, highlighting potential monetization opportunities from AI adoption.   Monty Rakusen  Summary I gave a buy rating to Similarweb (NYSE:SMWB) in July, with my key thesis being that the business has a strong competitive advantage against peers, stemmed from its ability to source and synthesize data alongside its vast number of historical datasets (that are very hard to replicate). I am downgrading my rating from buy to hold as the upside is no longer as attractive as it used to be. For readers that have followed my recommendation, I think it is a good time to lock in the gains (~69% over 4 months). The fundamentals still look great for SMWB, but until there is a better entry point, I am not going to turn bullish on this stock. Earnings results update In the latest quarter (3Q24) reported last week, SMWB grew total revenue by 18% Y/Y to $64.7 million, marking the 4th straight quarter of growth acceleration since the sharp deceleration in 3Q23. Although gross margin compressed by 300 bps y/y to 80.1%, adj EBIT margin saw strong expansion of 470 bps y/y to 6.7%, mainly due to the strong topline growth and a moderate growth in operating expense (6.6% y/y growth). Accordingly, adj net income grew substantially from $1.12 billion in 3Q23 to $4.27 billion in 3Q24. This translated to an adj EPS figure of $0.05, beating consensus estimates by $0.01. Fundamentals continue to improve It was absolutely encouraging to continue seeing SMWB’s fundamentals improve. The most notable aspect was the 200bps improvement in net retention rate [NRR] to 101%, as this marks the first time in five quarters that NRR went above 100%, indicating an expansionary growth trajectory (for existing customer base). While the NRR improvement came from both large (>$100k in ARR) and small/medium (<$100k in ARR) accounts, it is clear that SMWB is making huge progress in its large accounts, as the large accounts NRR increased to 111% and the small/medium accounts NRR increased to 86% (still contractionary). In my opinion, it is likely that small/medium accounts NRR will continue to improve in the coming quarters as most of this cohort has renewed its contracts in the past 2 years. However, I would expect large accounts NRR to see a strong expansion as SMWB steps up its focus on enterprise accounts. So far, management has identified upwards of 90 accounts that they believe can drive penetration even higher. I believe management has adopted the right strategy, as larger clients have deeper pockets to sign longer deals, which provides more revenue visibility and arguably better unit economics (one-time effort to win a large deal vs. multiple efforts to win many small clients). As of 3Q24, multiyear deals account for 45% of annual recurring revenue [ARR], marking a 100bps sequential improvement and 200bps annual improvement. Based on the data available, there shouldn’t be an issue for this 45% to move up to 60%, as large accounts represent around 60% of ARR (compared to 55% last year). SMWB is an indirect beneficiary of growing AI adoption Apart from its core business, the 3Q24 results shed light on two additional growth drivers that are very promising. Firstly, SMWB is seeing strong interest from customers in tapping on its data for AI model training. Currently, SMWB has signed two customers (both eight-figure deals), of which both are Big-Tech customers that had been using multiple solutions offered by SMWB for some time and have recently expanded their use of the platform to train their LLMs utilizing SMWB's digital data. With SMWB engaging several other companies regarding similar opportunities, I believe this highlights the sizable market opportunity for SMWB and that it is an indirect beneficiary from the growing AI adoption wave. More importantly, given that SMWB has the deepest pool of data (in the field it is competing with), it should continue to garner customer interest in this use case, thereby providing SMWB with more monetization opportunities. Valuation   Source: Author's calculation For what it's worth, I wrote about SWMB when the share price was at ~$7.40, and at the current share price, it has already delivered great returns (~69% in ~4 months). Unfortunately, I have to downgrade my rating for SMWB from buy to hold as valuation has caught up. Based on my model, there is only about 6% upside left. After reviewing the 3Q24 results, I now have even more conviction that SMWB accelerates its growth back to 20% in the next two years, driven by solid upmarket penetration traction and growing AI adoption (which drives the need for LLM training). As such, I continue to have the view that multiples should rerate upwards, minimally to 3x (the peak that SMWB traded at in early 2024). That said, these assumptions translate to a share price target of $13.30, just 6% above the current share price of $12.50. Conclusion  My downgrade to hold for SMWB is because the current valuation appears to have priced in any near-term upside. I agree that the 3Q24 results were marked by solid revenue growth, margin expansion, and an improved net retention rate, which underscore its solid fundamentals. SMWB's focus on large enterprise accounts and its emerging role in AI model training further make the growth outlook attractive. That said, I believe a more attractive entry point is necessary to justify a buy rating.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","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":"4.29.3","shortVersion":"4.29.3","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/2485245796"}