New holding - GoDaddy

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.