Potentially one of the most highly anticipated initial public offerings (IPOs) of 2015, GoDaddy stocks are expected to hit the markets trading at an IPO price of between $17.00 and $19.00 a share. A GoDaddy IPO is expected to raise a low estimate of $374 million to a maximum of $455 million. At the top end of the range, this would give GoDaddy a market value of $2.87 billion. But what’s the hype all about? Hasn’t GoDaddy tried going public before?
GoDaddy IPO: Revenue Growth the Only Driver?
GoDaddy (officially The Go Daddy Group, Inc.) is the world’s largest domain name registration and web hosting service provider. With approximately 13 million customers, GoDaddy offers the opportunity for business owners to register a unique web site name. It also offers tools to design a fully functional webpage, provides hosting along with security features to maintain the site, and offers applications to connect with customers.
A simple .com address costs $10.00 a year, while a business web site builder costs $11.00 a month, web hosting through GoDaddy’s servers is another $5.00 a month, and online marketing can cost up to $20.00 a month.
GoDaddy has a solid subscription fee business with attractive pricing to meet revenue targets and customer needs. In fact, business application services like e-mail, data storage, and third-party productivity applications have been the highest revenue growth segment since 2012. Overall revenues have grown 23% since 2012, and this is one of the major bullish drivers behind the GoDaddy IPO. However, it may be the only one…
Why Private Equity Investors Are Eager to Take GoDaddy Public
The primary way GoDaddy has grown revenues is through aggressive marketing, from commercials with Danica Patrick, the only woman to have won an IndyCar series race, to this year’s Super Bowl ad with a puppy struggling to find its owners only to get sold to a new owner on a GoDaddy-powered site. Creative campaigns have supported revenues, but bottom-line profits have not come through.
Over the last three years, components like marketing and advertising expenditures, customer support costs, and administrative expenses (in summation, called “operating expenses”) have been greater than revenues. To drive this home, let me repeat this point: GoDaddy has reported a loss in each of the last three years. No wonder private equity investors who purchased GoDaddy in 2011 for $2.25 billion are eager to take the company public.
Is there anything left to consider?
GoDaddy’s IPO and Competition
If I were GoDaddy, I would argue that the focus on near-term results is too shortsighted. GoDaddy boasts 21% of World Wide Web domains, with local solutions across 37 countries and a team of 3,400 customer specialists. (Source: U.S. Securities and Exchange Commission, March 19, 2015.) I would agree that GoDaddy provides an excellent service, but is it a great stock for investors?
Well let’s look at GoDaddy’s real competition. This includes companies like Web.com Group, Inc. (NASDAQ/WWWW), which went public in late 2005; Rackspace, which provides cloud-based hosting solutions for businesses; Endurance International, which also helps small businesses build online brands; and Wix.com Ltd. (NASDAQ/WIX), which also provides web site-building tools.
That’s quite the list for a relatively new industry presenting opportunities for future consolidation. In this respect, I don’t question that GoDaddy commands far greater brand recognition than most peers, but this isn’t a full list of its competitors.
The real question is whether stalwarts of the online industry will enter this space—squeezing GoDaddy’s market share and lowering the payout of advertising. They will.
Google Inc.’s (NASDAQ/GOOG) “Google Domains” is live in a beta version and offers a host of features, most overlapping with GoDaddy. Can you imagine the benefit with Google’s other services like “Gmail,” “Google AdWords,” and “Google Drive,” which allows for cloud storage of data? Not to mention other potential competitors like Amazon.com, Inc. (NASDAQ/AMZN) and Microsoft Corporation (NASDAQ/MSFT), which can enter GoDaddy’s industry at a moment’s notice.
GoDaddy IPO to Pay Off Debts?
KKR & Co. and Silver Lake Management LLC, the private equity investors behind the GoDaddy IPO in 2015, probably realized that this was their only chance at “go time.” Private equity is without a doubt aware of the hot IPO market, which in 2014 saw a decade-high in the number of filings and total capital raised. (Source: Renaissance Capital web site, last accessed March 19, 2015.)
In fact, GoDaddy outlines its intended use of the funding in the regulatory filings for the Securities and Exchange Commission (SEC). The majority of the proceeds—a total of $315 million—will be used to repay debt on GoDaddy’s books. The debt is owned by its two private equity investors. (Source: U.S. Securities and Exchange Commission, March 19, 2015.)
So 80% of the expected proceeds from the public offering will be used to repay private investors. Only the remainder will be used to support GoDaddy’s business.
Repaying outstanding debt will reduce the burden on GoDaddy’s revenues, likely helping the company squeak out a profit post-public offering. However, the promise of future profits doesn’t change my outlook that the domain registration and web hosting space is highly competitive. GoDaddy will be forced to spend more to stay relevant, benefiting the users of its service (small businesses), not the bottom line for investors.
Investors are encouraged to do their due diligence and review the prospectus filed by GoDaddy with the SEC (which vaguely mentions a GoDaddy IPO date of “as soon as practicable”). On a final note, GoDaddy attempted going public in 2006 after five straight years of losses. (Source: U.S. Securities and Exchange Commission, March 19, 2015.) The company withdrew the offering citing weak IPO demand. The second attempt may be GoDaddy’s last and only chance.