A lot could still go wrong.
GoDaddy, the website hosting service with the provocative ads and a NASCAR sponsorship, is going public this week. Everyone loves a coming-out party, particularly for a well-known consumer brand. In general, however, investors ought to be appropriately skeptical of initial public offerings, particularly for well-hyped technology companies. In these transactions – as with any investment — price is what you pay and value is what you receive: Below, I lay out my initial thoughts on GoDaddy’s valuation.
“We have a history of operating losses and may not be able to achieve profitability in the future.”
That is one of the prominent risk factors that greets prospective investors in GoDaddy’s most recent prospectus. On a GAAP [generally accepted accounting principles] basis, GoDaddy has lost $622 million cumulatively over the past three years – hardly inconsequential for a company that generated $4.2 billion during that period. The good news, however, is that, as of last year, GoDaddy is profitable on the basis of free cash flow (which is what really matters, ultimately — not GAAP earnings).
By my calculations and based on a share price of $18 (the midpoint of the current indicative range of $17 to $19), GoDaddy’s enterprise value-to-EBITDA multiple is 7.2. Enterprise value (EV) is the sum of a company’s market capitalization and its net debt; EBITDA is a measure of cash flow, the acronym refers to earnings before interest, taxes, depreciation and amortization.
It’s cheap, surely
On that basis, GoDaddy is cheaper than all 10 companies in Bloomberg’s selection of comparable companies for which this multiple exists and roughly in line with AOL AOL 0% , at 7.5. The median for the group, which includes Facebook, Google, IAC/Interactive IAC/INTERACTIVECORP IACI 0.04% , Yahoo! and Yelp is 15.1.
So, GoDaddy looks cheap, then. If only it were that straightforward. I calculated GoDaddy’s EV/EBITDA using the firm’s own adjusted EBITDA figure of $271.5 million. However, Bloomberg puts 2014 EBITDA at $90.9 million, which would lift the EV/ EBITDA to 21.8. All of a sudden, GoDaddy is more expensive than all but three of its peers and significantly more expensive than Google, for example, at 14.7. As such, using EV/ EBITDA is inconclusive until one examines the adjustments the company makes to derive its EBITDA figure. I would tend to remain skeptical and lean toward an “expensive” verdict here.
On the other hand, looking at the price-to-free cash flow multiple, GoDaddy looks like a remarkable bargain at 2.3. Alas, a whopping three-quarters of its $443.8 free cash flow to equity in 2014 was the product of an increase in long-term borrowings — not a sustainable source of free cash flow. Still, even if we substitute the operating cash flow figure of $180.6 million for free cash flow, the multiple only rises to 5.6, which looks very reasonable by comparison with AOL (9.2), IAC/Interactive (15.1) or Yahoo! (85.3). In fact, that multiple would put it at the very bottom of its peer group.
Finally, let’s resort to a blunt instrument: the price-to-sales multiple. For GoDaddy, that number is 0.73, which looks pretty darn cheap for a technology company. The S&P North American Technology Sector Index was valued at 2.92 times sales at the end of February.
May be cheap… within the indicative pricing range
I’m going to come down on the side that says, based on this preliminary assessment, GoDaddy shares look cheap. (That holds at the $18-per-share midpoint of the indicative pricing range, which could of course end up being substantially lower than the price at which they become available in the secondary market.) The Wall Street Journal reported last week that the GoDaddy IPO could see the company raise as much as $418 million and give it a market value near $3 billion.
Furthermore, the business has some attractive qualities, including its high retention rates (over 85% in aggregate and approximately 90% for customers that have been with the service for over three years). Nevertheless, I would strongly encourage investors who are considering buying the shares to read the prospectus closely, particularly the “Risk Factors” section (all 36 pages of it!). Everyone likes to imagine what could go right with an investment, but a prudent investor likes to spend more time gauging what could go wrong.