Elevator Pitch
My rating for GoDaddy Inc. (NYSE:GDDY) shares is a Hold.
With my earlier March 20, 2023 write-up, I evaluated GDDY’s financial guidance and share buybacks target for fiscal 2023. In this latest update, my focus is on the preview of GoDaddy’s upcoming earnings for the second quarter of the current year.
My analysis leads me to the conclusion that GoDaddy’s Q2 2023 results should meet the sell-side analysts’ expectations, and I also think that GDDY stock is fairly valued. This explains why I have chosen to stick with my existing Buy rating for GoDaddy.
The Market’s Expectations Of GDDY’s Q2 2023 Results
GoDaddy will reveal the company’s Q2 2023 financial performance on Thursday August 3, 2023 after trading hours.
Wall Street sees GDDY delivering a better set of financial results for the second quarter of this year, as compared to how the company performed in Q1 2023. In specific terms, the sell-side analysts are forecasting that GoDaddy will register revenue growth acceleration and positive earnings expansion for Q2 2023.
Based on S&P Capital IQ’s consensus financial projections, the analysts predict that GoDaddy’s YoY top line growth will accelerate from +2.0% for Q4 2022 and +3.3% for Q1 2023 to +3.8% in Q2 2023. GDDY’s revenue is also estimated to increase by +1.8% on a QoQ basis in the second quarter of the year.
Separately, the sell side expects GDDY to register a +26.9% QoQ (source: S&P Capital IQ) increase in non-GAAP adjusted earnings per share or EPS for Q2 2023. The consensus financial numbers for GoDaddy also point to a +20.1% expansion in the company’s second quarter normalized EPS in YoY terms.
In the next section, I assess how GoDaddy is likely to have performed in Q2 2023 relative to market expectations.
My Prediction Is That GoDaddy’s Second Quarter Performance Will Meet Expectations
In my view, GDDY’s actual financial results for the second quarter of 2023 should have been in line with what the Wall Street analysts have been expecting.
GoDaddy is likely to have achieved a faster pace of top line expansion in Q2 2023 vis-a-vis Q1 2023.
At the company’s first quarter earnings briefing on May 4, 2023, GDDY highlighted that “this year’s revenue growth rate includes approximately two points of FX (Foreign Exchange) pressure from last year’s bookings” and mentioned that its aftermarket business was negatively impacted by “a continued unevenness in flow of large deals.” These were the two key factors that hurt GoDaddy’s top line performance for the first quarter of 2023.
GoDaddy’s management comments at a JPMorgan (JPM) investor conference on May 22, 2023 (two and a half weeks after its Q1 result call) suggest that it is highly probably that the company’s revenue growth would have improved in Q2 2023. Firstly, GDDY noted at the recent JPM investor event that “the FX hangover that we had in our bookings” should “start to abate” in the second quarter of 2023 and beyond. Secondly, GoDaddy shared that it is “seeing the flow come back” with an increase in “the quantity of the deals” for its aftermarket business. More importantly, GDDY remains confident that its revenue growth rate will eventually return to +10% or better in time to come.
With respect to profitability, GDDY’s actual normalized EBITDA margin for Q1 2023 was 24.1%, and the company aims to improve its non-GAAP adjusted EBITDA margin to 28% (source: first quarter earnings call) in Q4 2023. The current Q2 2023 consensus financial figures (source: S&P Capital IQ) for GoDaddy imply that its normalized EBITDA margin will expand from 24.1% in Q1 2023 to 25.4% for Q2 2023, which seems achievable considering its much higher fourth quarter operating profitability guidance.
At the May 22, 2023 JPM investor event, GoDaddy stressed that it is enjoying the effects of positive operating leverage as it transforms into an “one-stop shop.” As GDDY steps up cross-selling efforts, there will be more clients buying both domains and applications from the company. As such, GoDaddy is able to generate higher profit margins by growing revenue on a per customer basis. The costs associated with serving a client who purchases multiple products (domains and applications) are not expected to be meaningfully higher than that for a customer who only buys domains.
In a nutshell, I don’t expect positive or negative surprises when GDDY announces its second quarter earnings later this week.
GDDY Is At A Fair Valuation
The market currently values GoDaddy at 12.9 times (source: S&P Capital IQ) consensus forward next twelve months’ EV/EBITDA. In comparison, GDDY’s consensus FY 2023-2027 normalized EBITDA CAGR is 12.0% as per S&P Capital IQ data.
A rule of thumb is that a stock is seen as fairly valued assuming that its earnings-based valuation multiple is equal or close to its earnings growth rate. In this case, it is reasonable to conclude that GoDaddy shares are at a fair valuations, considering its EV/EBITDA metric (12.9 times) and its EBITDA CAGR (12.0%).
Closing Thoughts
GoDaddy’s stock is neither undervalued nor overvalued. I also don’t think that GoDaddy’s earnings release this Thursday will throw up any big surprises. As a result, I have decided to retain a Buy rating for GDDY.
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