HL SELECT GLOBAL GROWTH SHARES

New holding - GoDaddy

Fund changes

Important information - The value of this fund can still fall so you could get back less than you invested, especially over the short term. The information shown is not personal advice and the information about individual companies represents our view as managers of the fund. It is not a personal recommendation to invest in a particular company. If you are at all unsure of the suitability of an investment for your circumstances please contact us for personal advice. The HL Select Funds are managed by our sister company HL Fund Managers Ltd.

Written by Gareth Campbell

We’ve invested in GoDaddy, the world’s biggest domain name company. It has over 78 million web addresses under management, and over the last few years has used this footprint to expand into other services that small and medium-sized businesses need in order to build and maintain its online presence.

Small and medium-sized businesses dominate the marketplace in developed countries, aptly demonstrated by the UK where 99.9% of businesses are small or medium-sized. There is a high and growing need for all of these businesses to have a website, whether it’s for direct sales, as a source of information for potential customers or simply a way to indicate professionalism and improve customer trust.

GoDaddy is excellently positioned to sell to this market. When starting a business, one of the earliest steps is coming up with a name and registering it as a website domain, meaning GoDaddy is often the first external contact point for new businesses.

Why we bought it

Domain names is GoDaddy’s origin, and it’s successfully become the market leader, but we were attracted to GoDaddy because it has evolved its business model and, in doing so, we believe has structurally improved the quality of the company.

Rather than focus solely on selling and managing domains, it now uses this as a funnel to bring customers into its ecosystem at relatively low cost, after which it can provide other applications and services which are more valuable to both GoDaddy and its customers.

The current average revenue per user is around $150 but GoDaddy believes the average small business spends $1000-$2000 on services it could provide. By offering these services, it can increase profit per user and create more value for customers.

For example, GoDaddy uses its position within the small and medium-sized business market to sell partner products, and has become the largest reseller of Microsoft 365 in the world as a result. It also found that customers are nine times more likely to use a business with a professional email address, rather than a personal one, so it now offers email accounts as part of its service.

By bolting on services or applications to their traditional domain proposition, GoDaddy has created a unique business model amongst its peers, and importantly for us, has created a virtuous cycle which supports growth and reinforces its barriers to entry.

The breadth and quality of GoDaddy’s services and applications creates value for customers, enabling it to charge more, which generates free cash flow which can be used to develop and improve products and create more value for customers.

Room to grow

GoDaddy already has eight million customers across the world that generate over $1 billion in revenue , but we believe there’s room to grow. Its products are digital which makes them easily exportable across borders, and allied with its technology, product breadth and scale, GoDaddy is able to become a leader in new markets it targets.

For example, in 2012 the company launched a business in India and are now the market leader with over 30% market share in “.in” domains.

Capitalising on misconceptions

Investor awareness of GoDaddy is still low, with the majority underestimating its financial strength and perceiving it as a domain business with historically misogynistic marketing campaigns. Those days are long behind the business and, in fact, companywide it pays women the same as men in similar roles and has won multiple “Great Place to Work” awards.

Financially, because GoDaddy was bought by private equity in 2011 and IPO’d in 2015, it has accounting complexities which hide the underlying profitability of the business. At first glance, GoDaddy has low earnings per share and a high price-to-earnings multiple, which could put investors off. But this low obvious profitability hides a business that’s generating exceptional levels of free cash flow, and has been growing consistently for years.

At HL Select, we believe growth in free cash flow, not earnings per share, is a key driver of long-term value creation. Earnings per share is an accounting measure which can be easily manipulated, whereas free cash flow per share shows the actual cash generated over and above what’s required to keep the company in business.

We believe GoDaddy can keep growing free cash flow, and so long as it does, it will have more money to reinvest back into the business, acquire new businesses or return to shareholders. All of which should keep GoDaddy at the forefront of its industry over the long-term.

Important - This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research

Non-Independent Research Disclosure

The information on this website is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

Any information which could be construed as “investment research” has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.

The research material provided on our website is not an offer to buy or sell any of the stocks mentioned. Hargreaves Lansdown accepts no responsibility for any use made of these comments and for any consequences that may result. We cannot guarantee the accuracy or completeness of the information provided and consideration has not been given to the personal circumstances of any investor. Therefore any person acting on it does so entirely at their own risk and must assess the suitability of any investment for their own personal circumstances and individual investment objectives. It is not a personal recommendation.

Although we are not specifically constrained from dealing ahead of any research material we do not seek to take advantage of it before it is provided to our clients. We aim to establish and maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of our clients (including restrictions on dealing for writers of equity commentary).

Hargreaves Lansdown Fund Managers Ltd (HLFM) manages funds that may hold investments which are the subject of commentary prepared and published by other parts of the Hargreaves Lansdown group. Accordingly, appropriate organisational and administrative controls (including physical and information barriers, known as “Chinese Walls”) are in place between different parts of our business, including our marketing and fund management functions, in order to manage these potential conflicts of interest. For more information please see our Conflicts of Interest policy. HLFM currently manages three funds which hold individual equity securities. Details of the significant shareholdings held by these funds can be found here for the HL Select UK Growth Shares fund, here for the HL Select UK Income Shares fund and here for the HL Select Global Growth Shares fund. Hargreaves Lansdown (Nominees) Limited holds individual securities as nominee on behalf of underlying clients of Hargreaves Lansdown, and does not exercise control over or hold the beneficial ownership of these securities.

We do not intend to provide recommendations to buy, sell or hold particular investments, nor do we provide price targets. Our opinions on particular investments (and the facts underlying them) are valid as at the date of publication, but can change at any time, and we may not update our views on any particular investment on a regular basis. Accordingly such opinions and facts may become outdated or obsolete after the date of publication.

Issued by Hargreaves Lansdown Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority (FCA Register number 115248, see FCA register for registration details) and registered in England and Wales No 1896481. Registered office: 1 College Square South, Anchor Road, Bristol BS1 5HL.

for more information. Unless otherwise stated performance figures are from Bloomberg and estimates, including prospective yields, are a consensus of analyst forecasts from Bloomberg. They are not a reliable indicator of future performance. Yields are variable and not guaranteed.