To The Moon

$GoDaddy(GDDY)$

GoDaddy has experienced strong performance over the past six months, with its shares outperforming the S&P 500 by 8.7% last year but The stock is currently priced at $183.99, reflecting a drop of 13.8% increase. This boost can be attributed to its solid quarterly results, leading investors to consider their next steps in light of the company’s positive performance.

Earning Overview

For the quarter ending December 2024, GoDaddy (GDDY) reported revenue of $1.19 billion, marking an 8.4% increase compared to the same period last year. Earnings per share (EPS) were $1.42, up from $1.08 in the year-ago quarter.

The reported revenue exceeded the Consensus Estimate by 1.38%, as the estimate was $1.18 billion. However, the reported EPS missed the consensus estimate of $1.46, resulting in an EPS surprise of -2.74%.

While investors often focus on year-over-year revenue and earnings changes, as well as how these figures compare to Wall Street's expectations, certain key metrics provide a clearer picture of a company's financial health. These metrics play a significant role in driving both top- and bottom-line results, and comparing them with past performance and analysts' estimates helps investors better gauge a stock's potential.

While a software company’s reported revenue may include low-margin items such as implementation fees, annual recurring revenue (ARR) represents the total contracted revenue from software subscriptions for the next 12 months. ARR focuses on high-margin, predictable revenue streams that are key to the value of SaaS businesses.

GoDaddy’s ARR reached $4.04 billion in Q4, with a year-on-year growth rate of 7.8% over the past four quarters. This growth fell short of expectations, indicating that rising competition may be making it more difficult to secure long-term commitments.

Fundamental Analysis

Customer Churn Impacts Long-Term Outlook A key advantage of the software-as-a-service model, and a reason for its high valuation multiples, is that customers generally spend more on a company’s products and services over time.

GoDaddy’s net revenue retention rate, a crucial metric that measures how much existing customers from a year ago are spending today, was 85.5% in Q4. This suggests that GoDaddy's revenue would have declined by 14.5% over the past 12 months if it hadn't acquired any new customers. With such a low retention rate, it signals that GoDaddy is experiencing customer churn, which raises concerns about whether its products are meeting customer expectations.

Low Gross Margin Highlights Weak Structural Profitability

For software companies like GoDaddy, gross profit indicates how much money remains after covering the basic costs of products and services, such as servers, licenses, and certain personnel. These costs are typically low as a percentage of revenue, which is why software businesses tend to be more profitable than other industries.

GoDaddy’s gross margin is significantly lower than that of most software companies, indicating it faces relatively high infrastructure costs compared to asset-light businesses like ServiceNow. Over the past year, GoDaddy’s average gross margin was 63.9%, meaning it paid $36.12 to its service providers for every $100 in revenue.

Guidance

When considering a stock purchase, future outlook is a key factor, especially for investors focused on growth. While value investors may prioritize intrinsic value relative to price, a stronger investment case typically combines high growth potential with an attractive valuation. However, in GoDaddy’s case, earnings are projected to decline significantly over the next few years, which weakens its investment appeal. This suggests a high level of uncertainty in the near term, making the risk factor more prominent for potential investors.

GoDaddy's 2025 guidance projects the following:

• Q1 2025 Revenue: Expected to be between $1.175 billion and $1.195 billion.

• Full-Year 2025 Revenue: Projected to range between $4.86 billion and $4.94 billion, indicating continued growth from 2024.

Free Cash Flow

For Q4 2024, GoDaddy reported: Free Cash Flow (FCF): $342 million, reflecting a 12% year-over-year growth. For the full year of 2024: Free Cash Flow: $1.4 billion, showing a 25% increase from the previous year.

High Debt problem

GoDaddy has a relatively high level of debt, which has raised concerns among investors regarding its financial stability and ability to manage future obligations. While the company has successfully generated strong cash flow and consistently increased free cash flow, its debt load remains a key point of focus.

As of recent reports, GoDaddy’s debt is primarily in the form of long-term borrowings, and the company has been working to reduce its leverage over time. However, the high debt levels can create pressure, especially if interest rates rise or if the company faces challenges in maintaining its cash flow growth.

While GoDaddy has managed to maintain strong operating results, it is crucial for the company to balance its debt with continued revenue growth and operational efficiency to avoid potential debt-related issues in the future. This will be something for investors to keep an eye on, as an excessively high debt burden can limit flexibility and increase financial risk.

Risks and Challenges

Economic Uncertainty & SMB Spending GoDaddy’s customer base consists largely of small and medium-sized businesses (SMBs), which are sensitive to economic downturns. If SMBs cut back on spending due to inflation or recession fears, GoDaddy’s revenue could be impacted.

Margin Pressure & Cost Structure GoDaddy’s gross margin of 63.9% is lower than many other SaaS companies, partly due to higher infrastructure costs. Unlike more asset-light software firms, GoDaddy’s expenses related to data centers and hosting infrastructure could impact profitability.

Slower Growth in Core Platform Revenue While the Applications & Commerce segment (which includes e-commerce and business tools) is growing, GoDaddy’s core platform revenue grew only 3.9% year-over-year. Slower growth in its primary domain registration and hosting business could signal market saturation.

Increasing Competition GoDaddy faces stiff competition from other domain registrars, web hosting providers, and website builders, including Google Domains (now owned by Squarespace), Shopify, Wix, and WordPress.com. As competitors enhance their offerings, GoDaddy must continuously innovate to retain market share.

Valuation

As of March 27, 2025, various Discounted Cash Flow (DCF) valuations suggest that GoDaddy Inc. (GDDY) may be overvalued.

Another valuation suggests an intrinsic value of $153.48 per share, compared to the current market price of $175.02, implying the stock is overvalued by 12%. Additional valuation models provide varying insights, but overall, they suggest that GoDaddy may be trading above its intrinsic value.

These valuations indicate that GoDaddy's stock might be priced higher than its fundamental worth based on projected future cash flows. However, DCF models are highly sensitive to assumptions regarding growth rates and discount factors, so investors should consider multiple factors before making decisions.

Market sentiment

Market sentiment around GoDaddy (GDDY) is currently mixed, influenced by both positive and negative factors.

Bullish Sentiment:

Strong Cash Flow: GoDaddy continues to generate solid free cash flow, supporting its financial stability and potential for shareholder returns. Stock Performance: The stock has outperformed the broader market in recent months, reflecting investor confidence. Growth in Applications & Commerce: This segment, which includes e-commerce and business tools, has shown strong revenue growth, helping diversify the company's income streams.

Bearish Sentiment:

Earnings Growth Concerns: Analysts expect GoDaddy’s earnings to decline in the coming years, raising concerns about long-term profitability. High Debt Levels: The company's leverage remains a point of caution for investors, especially in a high-interest-rate environment. Weak Customer Retention: A net revenue retention rate of 85.5% signals customer churn, suggesting challenges in sustaining long-term revenue growth.

Overall Sentiment:

Investors appear cautiously optimistic, with confidence in GoDaddy’s ability to generate cash flow but concerns about long-term growth and competitive pressures. While the stock has performed well recently, uncertainty about future earnings and retention challenges may limit its upside potential.

Conclusion

GoDaddy isn't a bad business, but it's not one of our top picks. With its stock outperforming the market in recent months, it currently trades at 5.1× forward price-to-sales (or $183.99 per share). While investors with a higher risk tolerance may find the company appealing, we don't see a significant opportunity right now.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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