GoDaddy Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

GoDaddy is a technology company that offers a range of web hosting, domain registration, and related services primarily to small businesses, with a growing focus on higher value-added products and subscriptions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

GoDaddy’s business revolves around providing the essential infrastructure and tools for individuals and small businesses to establish and grow their online presence. This includes domain registration, website hosting, website creation tools, security solutions, and marketing services.

Business Overview

GoDaddy’s revenue streams can be broadly categorized as: * Domains: This segment includes the sale and registration of domain names, as well as aftermarket domain sales and renewals. Domain sales have been consistently growing and are usually recurring. * Hosting: The hosting segment involves providing space on servers to host websites, along with related services such as website builders and security products. * Business Applications: This segment includes a wide array of business tools like email marketing, search engine optimization (SEO), and social media marketing. This segment is designed to serve the various needs of different businesses and help them gain success online.

  • Payments : This segment is about new financial products for customers, allowing them to integrate payment processing, which is important for an online business.

  • Trends in the Industry: The industry is characterized by intense competition, low switching costs for basic services, and increasing demand for bundled solutions. There’s a clear trend toward higher value-added and subscription-based services, like those offered in the Business Applications segment, that provide greater monetization potential.

  • Margins: GoDaddy’s gross margins are relatively strong (around 60% or higher). The company’s operating margins tend to be lower, however, due to higher selling and administrative expenses. This indicates that while the core services are highly profitable, the investments in sales and marketing weigh on the overall profitability.

  • Competitive Landscape: GoDaddy operates in a fiercely competitive market with various players, including other domain registrars (like Namecheap), large hosting companies (like Amazon Web Services and Google Cloud), and web-building platforms (like Wix and Squarespace). This means there is no scarcity of choices, which creates a lot of competition and prevents companies from gaining a monopoly-like position.

  • What Makes GoDaddy Different: GoDaddy differentiates itself by offering a comprehensive suite of products tailored to the needs of small businesses, along with a well-known brand name and focus on customer service. GoDaddy’s brand recognition and large customer base provide it with an edge over smaller and newer competitors in the market. However, the competition is increasing, as newer companies have become more sophisticated at a faster rate.

Moat Analysis: 2 / 5

While GoDaddy has certain strengths, its economic moat is relatively narrow, resulting in a moat rating of 2/5:

  • Intangible Assets: GoDaddy has a strong brand name, especially within the small business market. They are the most well known when it comes to domain registration or web hosting, which does grant them some customer preference and power. However, these aren’t very significant in the real world, as their moat is not as strong when compared with other companies. Many newer website-builder companies have much higher ratings with clients.
  • Switching Costs: There are some switching costs associated with moving from GoDaddy, mostly relating to the time spent setting up a website, moving content, and the hassle of learning a new platform. However, these costs are not prohibitive, especially for small businesses, or customers looking for a new host company.
  • Network Effects: In certain segments such as payments, a network effect could emerge, but currently, this effect is minimal. Other than some general communities related to using GoDaddy, there is no real significant network effect for the company.
  • Cost Advantages: GoDaddy has tried to achieve a low-cost structure and they have done fairly well, but other companies can easily replicate that. This is because their business model is not particularly unique, and there are many competitors who can provide similar services. They don’t necessarily possess any proprietary process. There are no unique assets and resources that give them a lasting cost advantage compared to competitors.

Ultimately, GoDaddy’s moat is primarily based on brand recognition and somewhat on switching costs which provides it with a slight advantage. However, the ease of switching to competitors and the general nature of their services does not give them a strong competitive advantage.

Legitimate Risks That Could Harm the Moat and Business Resilience

  • Competitive Pressure: The company is very prone to intense competition from various providers, which could rapidly erode its customer base and profit margins.
  • Pricing Pressure: Given low switching costs for basic services, competitors can pressure GoDaddy on price, which could lead to a race-to-the-bottom.
    • Technology Disruption: Changes in technology could make certain offerings obsolete or allow for new entrants offering superior alternatives.
    • Security Threats: The company is very vulnerable to cyber security attacks, which could affect the company’s financial statements and user confidence and also be expensive to recover.
  • Changing Consumer Habits: As customers change their online presence or methods of doing business, it can cause a major decline in demand for their services. For example, the rise of social media and its integration in many companies can make website-based infrastructure less important in the business world.
  • Customer Acquisition Costs: Customer acquisition costs are increasing. It will be harder and harder to get new customers to join the platform when there is a lot of competition.

Business Resilience: GoDaddy does have some resilience in its business given its diverse offerings and recurring revenue model. However, it would be extremely hard to recover in an event of significant security issue, where the user data could get stolen. Also, customer loss would severely harm them, as the company will take a long time to recover from the loss of customer trust, especially if the competitor is not as easily attacked.

In-Depth Financials

  • Revenue Growth: GoDaddy’s revenue growth has been steady, primarily from the continued increase in the number of customers using their platform and subscribing to their services. However, they are slowly pivoting towards more value-added subscriptions for higher growth opportunities. In particular, Business Applications and Payments have been a key source of growth.
    • Q1 2024 – Total revenue increased by 6.8% year-over-year, with notable growth in applications and commerce segments.
    • 2023: Total revenue grew by 6.2% over the course of the year, indicating a solid revenue trend.

It is important to focus on the revenue of different segments for GoDaddy to truly see what are the growth opportunities for the company. Their core domain business is not showing a lot of growth, however the Business Applications and Payment sectors are really where their growth is concentrated.

  • Profitability: While revenue has been growing, profit margins remain constrained by high operating expenses. There is constant pressure to gain more customers, and therefore they need to spend more money on marketing and product development. However, the company has made significant progress in improving its margins recently.
    • 2023: Reported operating profit was $271 million, up from $190.5 million in 2022. Net income was $518.2 million versus $129.2 million in 2022, primarily owing to better cost management.

This shows that management’s plan to cut expenses is working and helping margins grow, but also shows that margins have not always been good for the company, meaning that they are not in an ideal position to protect the core business.

  • Cash Flow: GoDaddy generates strong cash flows from operations.
    • 2023: Net cash provided by operating activities was $1.4 billion, up from $1.1 billion in 2022. However, free cash flow was $960 million for 2023, which is not far from their net income, showing that they have a positive business model and ability to generate free cash flows.
  • Capital Structure: GoDaddy’s capital structure is characterized by a significant amount of debt and related interest expenses. They have been leveraging debt to fund acquisitions and buybacks.
    • As of the end of 2023, cash and cash equivalents were $396.5 million, total debt was $3.3 billion, and total shareholder equity was at $884 million.
    • Their debt to equity ratio has generally remained under 4, while total debt to enterprise value was around 30%.

As we can see, the company’s debt is quite substantial, and therefore it means that the company is vulnerable to any major drop-off in revenues, where the company might not be able to service the debt and thus could default.

  • Recent Developments: GoDaddy has been focusing on integrating AI into its offerings, enhancing its security measures, and expanding its presence in international markets, including Latin America and Asia. They are looking to grow the business but are doing so carefully. GoDaddy has implemented changes to its business model and introduced new products, such as GoDaddy Payments and their expansion into commerce.

  • Risks, Problems & Controversies:
  • Competition: GoDaddy is prone to high competition from bigger tech companies and new start-ups, it makes it difficult for the company to maintain pricing or grow their business.
    • Management has noted that the company is focused on adding value in its products and customer relations to help counter this increasing competition.
  • Economic Recession: The company has stated that a slowdown in the economy could affect small businesses, which could significantly harm them.
    • It is not clear what is their position for if these scenarios play out, since the company has not elaborated on a plan on how to solve this problem.
  • Unpaid Debt: As highlighted above, the company has a pretty high debt load that is making investors wary.
    • On top of that, since GoDaddy is an “aggressive” acquirer, that means the debt load could grow even more in the future, giving shareholders cause for concern.

Understandability: 2 / 5

GoDaddy’s business model is relatively easy to understand. They provide online services to small businesses. But the technical details of their offerings (like server hosting and data processing), their reliance on acquisitions, and their accounting complexity makes understanding the company more complicated. It requires knowledge of business, technology and finance to truly comprehend the company’s direction. The company’s earnings statements are complex, and it also requires some knowledge of accounting rules to understand them fully. There are a lot of moving parts in the company’s financial statements that a novice investor may get confused by. This implies a rating of 2 / 5.

Balance Sheet Health: 4 / 5

Although GoDaddy carries significant debt, the company has a healthy current ratio and consistent cash flow from operations. They have successfully generated enough cash to be able to service all their existing debts, and they have grown their cash holdings. The company is also very successful in managing expenses. However, their high debt might cause some problems in a severe recession. So, while their financial position is mostly healthy, there are factors that prevent it from scoring a perfect five. This warrants a balance sheet health rating of 4 / 5.