Is SEMrush Stock Overvalued?

Semrush Holdings (NYSE:SEMR) is one of the best-performing IPOs launched in 2021. The company nearly doubled in value since its public listing, but relative to its financial performance questions loom over how sustainable this growth phase will be.

So, is SEMrush stock overvalued?

The company is at the forefront of the online marketing industry, and its dashboards provide competitive on-site and off-site search engine and keyword analyses.

It’s an all-in-one solution for companies seeking the most effective way to strategize omnichannel advertising and marketing initiatives. It does so with a software-as-a-service (SaaS) business model that provides relatively predictable revenue.

Semrush has plenty of competition. Even a cursory glance at a marketplace like AppSumo shows there are plenty of rivals waiting in the wings.

And those are the startups – there are big sharks in these waters like Moz, AHrefs, Amazon.com (NASDAQ:AMZN), and Similarweb (NYSE:SMWB). Can SEMrush differentiate itself?

The Value SEMRush Provides To Customers Is:

SEMrush is a Boston, Massachusetts-based search engine marketing (SEM) company founded in 2008 by Oleg Shchegolev and Dmitri Melnikov. By 2016, it grew to over one million users across 100 countries by leveraging Google and Bing search data.

Users receive unbiased opinions on over 20 billion keywords across 20 million domains. It’s not selling the advertising space itself like search engines or social platforms, so the information is deemed to be trustworthy.

Indeed, the company has 76,000 clients around the world, including Wix (NASDAQ:WIX), Salesforce (NYSE:CRM), and Disney (NYSE:DIS). It had net revenue retention of 121 percent at the midpoint of 2021, proving these clients are satisfied with the data they get as part of their advertising and marketing strategies.

And SEMrush is a market leader in the growing SEO industry.

SaaS SEO Is A Rapidly Growing Industry

The SEO industry is a $41 billion industry that is expected to grow to $83.7 billion by 2025. This 19.6 percent compound annual growth rate (CAGR) is not guaranteed to match SEMrush’s performance. But the company is a market leader and grew sequential quarterly revenue by 13 percent at midyear.

SEMrush has achieved $1.19 million in net income for the first half of the year, compared to a $4.03 million net loss in the same period in 2020. It has over $180 million cash and equivalents on hand, thanks to raising over $137 million from its IPO.

SEMR balance sheet looks solid with $62.2 million in total liabilities. Management continues to excel in growing revenues sequentially, though consistent profitability remains a hurdle. Another challenge is the competitive landscape.

SEMrush Competitors

SEMrush has a lot of competition from SEO companies like Ahrefs and Moz that offer similar data on their platforms. There’s a $1.5 billion rival in Similarweb, and we can’t forget that Amazon owns two Alexa platforms – a voice assistant and a search engine ranking tool.

The biggest competitors in the market, however, are Meta (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL). To a lesser extent, it’s also competing with Microsoft (NASDAQ:MSFT) and other social platforms like TikTok and Twitter (NYSE:TWTR).

Although each of these major platforms is limited to its own data, that’s just fine for some companies. Their return on advertising spend (ROAS) is enough to justify directly pulling this data from each individual platform.

In fact, for many advertising professionals and SEO experts, it’s not an either/or situation – both are necessary.

SEMrush Financial Outlook

Full-year revenue is expected to be around $184 million, according to the company’s financial projections, which represents a 47 percent increase from the prior year. However, revenue isn’t the problem – profitability is.

SEMrush expects a net loss in the range of $6.3 million to $7.9 million for the full year. This is a relatively minor problem, as it’s heavily focused on spending to grow the business. It had $9 million in free cash flow for the first half of the year, which is a healthy sign.

The company’s data assets are certainly valuable, and the market is experiencing tailwinds. By bolstering its offerings, SEMrush is well positioned to take advantage of this future growth.

So what could derail management’s monetization plans?

Risks of Investing in SEMrush

Although it has some debt, that’s not the biggest problem for SEMrush. The bigger issue is the lack of a moat, an impenetrable fortress that can’t be breached with capital alone. 

Certainly, SEMRush has a happy customer base as evident by the firm’s reportedly high retention rate with existing customers. Will the rollout of a new Social Media Marketing toolkit and Keyword Difficulty score be enough to keep customers from migrating to competitors? Over the next decade, the lack of a moat could translate to losing market share to both larger competitors and newer upstarts.

The biggest selling point for the platform is that it’s an all-in-one solution. Major enterprises with omnichannel advertising needs don’t want to integrate with an abundance of different sources so they will likely use SEMRush in tangent with any new rivals that manage to eclipse it in one of its many specialties.

Is SEMrush Stock Overvalued: The Bottom Line

SEMrush stock nearly doubled within the first year since its IPO and has been largely on an upward trajectory.

This is because it has strong customer relations and is one of the few all-in-one solutions in the space. Customer retention is sky high and tailwinds of growth should spur sustained revenue growth for the foreseeable future. Eventually the profitability challenges should be overcome as a result and lead to continued bottom line results in the black.

Once the company reaches that profitability line in the sand, expect a big bump as investors join the party. Until then, it could be a turbulent ride moving forward as it competes with major enterprise technology giants.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.