Spencer Platt
Elevator Pitch
I have a Buy investment rating for GoDaddy Inc. (NYSE:GDDY).
GoDaddy’s share price went up by +42.0% (source: Seeking Alpha price data) after I raised my rating for GDDY from a Hold to a Buy with my October 10, 2023, write-up that highlighted several “potential value unlocking initiatives” for the stock.
GDDY recently took part in RBC’s Capital Markets Global Technology, Internet, Media, Telecommunications Conference, UBS’ (UBS) 27th Annual Technology, Media & Telecom Conference, and Barclays’ (BCS) Global Technology Conference on November 14, November 29, and December 6, respectively. I have a favorable opinion of GoDaddy’s disclosures at these investor events in the past month or so. I like GDDY’s cross-selling efforts, its new AI solution Airo, and the company’s capital allocation strategy. As such, I choose to leave my existing Buy rating for GDDY unchanged.
Successful Cross-Selling Translates Into Higher Retention Rates
It was mentioned at the RBC conference in mid-November that over half of GoDaddy’s clients are already utilizing two or more of the company’s products. This indicates that the company has made good progress in cross-selling its solutions, while there is still room to push clients to buy and use even more products. Typically, customers purchase a domain from GDDY, before buying other products such as email services, website creation, and payments.
At the late-November UBS conference, GDDY shared that the company’s mean client retention rate is around 85%. The customer retention rate for those who have bought at least two of GoDaddy’s products is above 85%. Customers who use three products from GDDY usually never switch to other domain solutions providers. A high and increasing client retention rate translates into significant revenue visibility and pricing power for GoDaddy.
There are signs that suggest GoDaddy is becoming increasingly successful with its cross-selling efforts by optimizing its customer base. GDDY noted at the early-December Barclays investor event that new “customers that are coming in are attaching to that second product faster”, and it revealed that client churn is mainly coming from customers without the “intent for that second or third product.”
These positives are reflected in GDDY’s guidance. GoDaddy guided at its most recent Q3 2023 earnings press release that it anticipates achieving a strong “applications and commerce revenue growth of approximately 13%” for Q4 2023.
AI Solution Airo Could Be A Potential Game Changer
GDDY disclosed in its latest third quarter results release that its new AI solution known as Airo was officially introduced to the market on November 28 this year. In its recent quarterly results release, GoDaddy described Airo as a “solution that automatically generates a logo, website, tailored content, communications and more.”
In my view, GoDaddy’s new AI tool, Airo, might be a game changer in terms of how this accelerates the cross-selling process for the company.
At the recent Barclays conference, the company offered an illustration of how Airo works in reality. A potential customer comes to GoDaddy with an idea of the kind of business he or she wants to start. Airo will provide a suggestion of certain domain names that are suitable for the client’s business. After the client has chosen the domain name, Airo prompts the customer to consider adding email addresses and corporate logos based on suggestions that it has generated. To make things even better, Airo has the ability to draft content that can be used for customers’ social media outreach.
GoDaddy provided a good summary of the value proposition of Airo at the UBS investor event, noting that Airo is “taking the friction out of the choices around products, that gets those decisions faster in the funnel for us.” It is easy to imagine that a meaningful number of GDDY’s clients would have simply just bought domains at GoDaddy without adding other products in the past, as they were overwhelmed by the number of choices they had.
In a nutshell, it will be reasonable to assume that GDDY can grow its number of clients with multiple products which stay with GoDaddy for life in the future by leveraging on its new AI solution, Airo.
Eyes On Capital Allocation
At the mid-November RBC investor event, GoDaddy emphasized that a key priority for the company is “doing the right thing around capital allocation”, and it stressed that “we’ve been buying back stock.”
GDDY’s recent shareholder capital return via share buybacks has been impressive for two key reasons. Firstly, the company’s year-to-date (up to end-October) share repurchases were approximately $1.3 billion, which has already exceeded its earlier FY 2023 share buyback guidance of $1 billion. Secondly, GoDaddy’s shares outstanding have decreased by a significant -20% with the $2.6 billion of share repurchases that it executed on in the past two years or so.
Looking ahead, GoDaddy highlighted at the Barclays investor conference that it “will continue to be opportunistic” with share buybacks, while considering “what else do we do and what are the other opportunities” to “provide that value to our shareholders” and “continue that growth momentum.” I think that GDDY’s management commentary suggests that the company will try its best to strike a balance between capital return and capital investment going forward. A balanced capital allocation approach for the future should be viewed favorably by investors.
Final Thoughts
GDDY is still undervalued, even though its shares have performed very well since early October as I indicated at the beginning of this article. GoDaddy currently trades at 18.9 times (source: S&P Capital IQ) consensus forward next twelve months’ normalized P/E. In comparison, the company’s consensus FY 2023-2025 normalized EPS CAGR forecast is +34.6%. This implies that GDDY’s PEG (Price-To-Earnings Growth) multiple is an undemanding 0.55 times. I think that GoDaddy’s stock price can continue to rise, considering its current valuations and the positive takeaways from its participation in recent investor events.