Jeffrey C. Smith’s Starboard Value is among the most promising up-and-coming hedge funds on Wall Street today. With over $5.2 billion of assets under management, Smith has created a diverse portfolio full of potentially undervalued companies. Interestingly, the fund’s single largest holding is web hosting giant GoDaddy (NYSE:GDDY). This stock currently accounts for 14.7 percent of Smith’s total portfolio
Why Is Smith Bullish on GoDaddy?
To understand Jeffrey Smith’s large position in GoDaddy, it’s first important to briefly consider his market-beating investment strategy. Smith is an activist investor who focuses on companies that are undervalued and suffering from management inefficiencies.
Smith has a long history of investing in tech companies that appear to have fallen behind the times, including Yahoo and AOL. Smith has also invested widely outside of the technology space, with Olive Garden, Papa John’s and Macy’s having all come under his influence at various times.
The most obvious part of GoDaddy’s appeal to Smith is its valuation. A 5-year discounted cash flow analysis suggests that the company’s fair present value is about $98 per share. At the time of this writing, the stock trades at just over $70. This places it at a nearly 30 percent discount to its likely intrinsic value.
GoDaddy’s value has also been bolstered by management’s recent share repurchase program. In the full-year results for 2022, GoDaddy detailed a total reduction in available shares by 10 percent over the course of the year.
This buyback is part of a multi-year program that will total about $3 billion. The company has been repurchasing shares since 2018, and the tailwinds from this ongoing program will likely bolster the stock over the coming years.
Web hosting companies as a whole may also see considerable success over the next several years. The web hosting market is expected to grow to $171.4 billion by 2027, creating substantial room for companies in this category to increase their revenues and earnings. As such, investors seeking long-term profits in the tech sector are widely interested in these essential companies.
A final point that may have attracted Jeffrey Smith to GoDaddy is the fact that the company still maintains a large presence in the web hosting market. 3.9 percent of all websites in the world today use one of GoDaddy’s hosting providers, including 2.3 percent of the top 1 million websites worldwide.
In total, about 41 million websites rely on GoDaddy for their hosting, and these sites will continue to generate ongoing revenue for the company.
GoDaddy Revenue, Earnings and Growth
Needless to say, GoDaddy will have to continue performing well as a business in order to be a value buy instead of a value trap.
Fortunately, the company appears to be on relatively sound footing. In Q1, GoDaddy reported 9 percent year-over-year growth in annualized recurring revenue from its applications and commerce division. ARR from the core hosting platform grew just 1 percent but was still $2.2 billion.
The company is, however, in what appears to be a temporary period of lower earnings. Net income for Q1 was $47.4 million, down about 30 percent from the previous year.
Analysts project earnings to remain positive throughout 2023, potentially indicating that the company could be in for a recovery as businesses become more willing to invest in digital products again.
GoDaddy also appears to be primed for a period of strong growth. Over the next 12 months, yearly earnings are expected to rise from $2.53 to $3.33 per share, a gain of over 31 percent.
Over the next 3-5 years, the company’s rate of annualized earnings growth is expected to be around 33 percent, giving it considerable upside potential during that time.
GoDaddy: The Bear Thesis
Although the company appears to be doing relatively well, GoDaddy isn’t without its fair share of potential hiccups.
To begin with, GoDaddy operates in a fiercely competitive market. With companies like Wix, Bluehost and even Amazon all jostling for market share in this space, GoDaddy isn’t the dominant force it once was. Amazon, for instance, has surpassed GoDaddy in total number of websites hosted.
Another risk of buying GoDaddy is the fact that the company’s margins are quite low. Net margin barely exceeds 8 percent, while the company’s return on assets is under 5 percent. With revenues growing, these numbers could improve in the future. For now, however, they remain among GoDaddy’s biggest drawbacks.
Finally, GoDaddy appears to be falling behind the curve when it comes to technological innovation. A prime example of this is the fact that the company only integrated Apple Tap-to-Pay into its payment system in Q1 of this year. If GoDaddy continues to lag technological developments, it could find itself struggling to compete with more agile tech companies.
How High Could GoDaddy Stock Go?
Analyst price forecasts for GoDaddy appear to line up relatively well with its projected DCF value.
The consensus target for the stock over the coming year is $90.50, an upside of 28.8 percent.
The stock also has a consensus buy rating, with 7 of the 14 analysts covering GoDaddy rating it as a buy. Notably, only 1 analyst has issued a sell rating on the stock.
Is GoDaddy Stock a Buy?
Although the company faces much more competitive pressure than it did in its early years, GoDaddy’s value proposition appears to be strong enough to make it a potential buy today.
With both good earnings growth prospects and support from buybacks, the stock seems to be trading well below its fair cash value. GoDaddy also has no long-term debt, making it an appealing option in a rising interest rate environment.
Here, it’s interesting to note that today’s investors can buy GoDaddy at a lower price than Jeffrey Smith’s average cost basis.
The stake held by Starboard Value was purchased at an estimated average price of $77.41, about 10 percent above the current trading price. As such, investors who buy the stock today can get an even steeper discount on GoDaddy’s intrinsic value than Smith did.
Overall, value investors who don’t mind waiting for the market to correct could see ample upside from GoDaddy. Given that Smith has made no move to divest from this stock, it’s clear that he still believes there is long-term value in GoDaddy. The company’s fundamentals seem to support this view, and it’s likely that the stock will see significant price improvements over the coming years.
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