Neilson Barnard
Elevator Pitch
Squarespace, Inc. (NYSE:SQSP) shares are being upgraded to a Buy investment rating.
I previously wrote about SQSP’s inorganic growth potential, the chances of the company becoming a takeover target, and how new business formation affects Squarespace’s prospects in my October 10, 2022 write-up.
For this latest article, my attention lies with Squarespace’s purchase of Google (GOOG) (GOOGL) Domains’ assets and the company’s profitability enhancement levers. SQSP’s actual FY 2024 top line could beat expectations, as its revenue guidance has yet to incorporate the positives associated with the Google Domains deal. The company also has levers to expand its margins, such as price hikes and new products like Squarespace Payments. Taking into consideration these favorable factors, I upgrade my rating for SQSP to a Buy.
Google Domains Acquisition Has A Positive Impact On SQSP
At the recent Morgan Stanley (MS) Technology, Media & Telecom Conference on March 6, 2024, Squarespace specifically touched on the significance of the company’s Google Domains Assets M&A deal, which deserves more attention in my opinion.
In September last year, SQSP revealed that it had concluded the “acquisition of the assets associated with the Google Domains business.” In an earlier June 15, 2023 press release, Squarespace indicated that this transaction also involved a partnership that makes it “the exclusive domains provider for any customer purchasing a domain along with their Workspace subscription from Google directly for a minimum of three years.”
There are two key positives associated with the Google Domains deal.
One key positive is Squarespace’s domain registration business is gaining market share with Google’s decision to sell its domain assets.
SQSP highlighted at the March 6 Morgan Stanley investor event that it has recently witnessed “extremely elevated rates of new domain sign-ups because of the fact that now Google has exited the domains industry.” The company also noted at this latest MS investor conference that it is now the “fourth largest” player in the domain space with the exit of Google.
Separately, Squarespace delivered a +3% revenue beat for Q4 2023, which it attributed to “customers coming over from Google Domains” at its latest quarterly earnings briefing.
The other key positive is that there is huge cross-selling potential relating to the acquisition of Google Domains’ assets and the Google Workspace partnership, which isn’t reflected in SQSP’s FY 2024 guidance.
In late February, the company guided for a +17% expansion in its top line and a +25% growth in its unlevered free cash flow to $1,180 million and $300 million, respectively for FY 2024 as per the mid-point of its guidance. At the company’s Q4 2023 earnings call, Squarespace had stressed that it is “not including any material contributions” pertaining to the “cross-selling of Squarespace products to our Google domain customers” as part of its FY 2024 guide.
SQSP shared at the Morgan Stanley Conference in early March that it is “closely tracking those” Google Domain clients and Google Workspace users and “how they upgrade to websites and e-mail.” In the June 15, 2023 press release announcing the proposed acquisition of Google Domains’ assets, Squarespace emphasized it will acquire “10 million domains hosted on Google Domains spread across millions of customers” as part of this transaction. In other words, SQSP has lots of potential to cross-sell its other product offerings to a significant number of Google Domains clients.
It is reasonable to assume that there is a high likelihood that Squarespace’s actual revenue and free cash flow for FY 2024 will be better than what it guided for, assuming that the cross-selling efforts associated with the Google Domains deal and Google Workspace partnership are successful.
Squarespace Has Good Profitability Improvement Potential For The Short Term And Long Term
SQSP’s FY 2024 sales and free cash flow guidance implies the company anticipates an expansion in its unlevered free cash flow margin from 23.8% last year to 25.4% this year. I am of the view that there is room for Squarespace to deliver an improvement in profitability and free cash flow margins for the near term and the long run.
In the short term, Squarespace noted that it has plans to raise prices for its new and existing clients later this year, which it hasn’t incorporated into its FY 2024 guidance yet. At the MS conference this month, SQSP mentioned that “we can get the list price higher for new customers” and “have an opportunity to modestly raise for existing customers” in 2024.
For the long term, there is the potential for SQSP to expand its profit and cash flow margins in a substantial manner with the introduction of its Squarespace Payments solution to the market in Q4 2023. In its Q4 2023 results press release, SQSP explained that Squarespace Payments “fully integrates with our customers’ online stores to accept fast and secure payments.”
The company highlighted at the March 6 Investor Conference that “people may not appreciate where those margins can really go” considering the potential increase in “fees in conjunction with payments.” Squarespace is hosting its 2024 Investor Day in mid-May, and it is likely to outline long-term profitability targets which might exceed investor expectations taking into account the recent bullish management commentary.
Closing Thoughts
Squarespace trades at a discount to its key peers, with its current consensus next twelve months’ Enterprise Value-to-Revenue multiple of 4.0 times, as per S&P Capital IQ data. In comparison, Wix.com (WIX) and GoDaddy (GDDY) are trading at relatively higher consensus next twelve months’ Enterprise Value-to-Revenue ratios of 4.5 times and 4.3 times (source: S&P Capital IQ), respectively. My view is that SQSP’s valuation multiple can expand and narrow the gap with peers in due course, as its actual top-line expansion and margins surprise the market in a positive way. As such, I rate Squarespace as a Buy.
