Shareholders of GoDaddy would probably like to forget the past six months even happened. The stock dropped 37.4% and now trades at $79.51. This might have investors contemplating their next move.
Is now the time to buy GoDaddy, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think GoDaddy Will Underperform?
Even though the stock has become cheaper, we’re cautious about GoDaddy. Here are three reasons why GDDY doesn’t excite us, plus one stock we’d rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
GoDaddy’s billings came in at $1.4 billion in Q1, and over the last four quarters, its year-on-year growth averaged 3.6%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect GoDaddy’s revenue to rise by 5.9%, a slight deceleration versus its 8% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will see some demand headwinds.
3. Operating Margin Rising, Profits Up
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses — everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, GoDaddy’s operating margin rose by 3 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 23.7%.
Final Judgment
We cheer for all companies solving complex business issues, but in the case of GoDaddy, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 2.1× forward price-to-sales (or $79.51 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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