Semrush (NYSE:SEMR) is currently undervalued by ~6%. Following COVID, there has been a significant global shift toward online business. This shift has resulted in a rise in digital marketing solution providers to serve the growing number of online businesses. Real and objective digital market insights help businesses decide what to say and where to say it, allowing them to make the most of their digital marketing budget. SEMR provides these real and unbiased market insights to businesses and digital marketers who want to manage or improve their online visibility. The spike in the digitization of businesses translates to a greater market opportunity for SEMR. An investment in SEMR is therefore in line with the digitization trend and should yield favorable returns in the long run.
SEMR is an online, all-in-one tool that helps businesses and individuals improve their online visibility and get market insights and trends. SEMR is a SaaS platform that helps companies and individuals alike identify, target, and reach the right audience for their messages using the right channels. SEMR uses unique insights and market trends to guide businesses on how to drive high quality traffic to their sites and pages. Businesses use these insights to send highly targeted content to their customers and to figure out how well their digital marketing campaigns are doing.
The COVID-19 pandemic resulted in fewer physical interactions between people and businesses. This resulted in businesses transitioning to digital content to sell their products and services. As people moved their interactions online, businesses also had to move online to continue driving demand for their products and services. There is a significant increase in digital content, especially on social media, blogs, and videos, which also increases competition for consumers' attention. The increased digital content is fueled by social media and organic search.
In a digital marketing process, the stage that introduces a company's brand to a consumer is called the awareness stage. At this stage, the value proposition of a brand is communicated to the consumer. If the objectives of this stage are not met, the return on investment for the business dips. If a positive company-consumer initial interaction is achieved, the digital marketing process will be efficient, and the company will scale and get long-term returns on sales and marketing budget spend.
Companies employ a variety of strategies to maximize online visibility and generate significant returns on their digital marketing investment, including:
Each strategy has advantages and disadvantages. For example, a paid advertisement is effective in driving immediate traffic to your site but is costly and requires regular content updates. For social media and digital PR, they are great for long-term traffic growth, but it takes a lot of work and money up front to build relationships with journalists and social media influencers.
When a company's site is ranked for particular keywords, it is sustained for a relatively long time. This drives huge long-term traffic to their site. The downside of this is the long time needed to create content to beat other sites competing for similar keywords on search engines. To get the most out of digital marketing, businesses need to use comprehensive strategies that combine paid ads, social media, digital PR, owned media, and SEO to get a long-term return on their investment and the most traffic to their sites.
The solutions that are currently available to companies don't provide all-in-one online visibility management. Companies have numerous channels and networks that they use to collect data online, but they lack the means and resources to combine and process this data. This hardens the process of making a conclusive report on how their content drives traffic to their sites. Even if they had the ability and resources to generate and interpret their own data, they would be unable to make informed analytics and insights because they lack the capabilities and intelligence of competitor websites. Available network-specific and point solutions lack the capability to show comprehensive insights about how a company is visible online. This limits the ability of a company to make informed decisions and changes to drive more high quality traffic to their sites.
Solutions provided by large tech platforms like Google (GOOGL) and Meta (META) only provide insights into their own platforms and are set to prioritize information on their own paid channels. This limits the ability of these solutions to provide companies with accurate and unbiased insights and functionality. This calls for an independent and unbiased solution provider.
As existing solutions don’t provide conclusive insight, companies resort to sourcing perspectives from several third party vendors and combining them to form a holistic view of their online presence. This complicates customer experience since products or information from third party vendors might not match or have a common finding. The importance of teams working together to manage their company's online visibility can't be stressed enough. But this will be impossible if they rely on information from several vendors.
SEMR's SaaS platform is based on two factors:
To streamline the analysis of data to be used by customers, SEMR has developed easy-to-use dashboards, report builders, project sharing, and task management capabilities. These features give customers an intuitive and modern experience and also enable teams within the company to work together to manage and improve their online visibility.
SEMR's software products cover important features of online visibility; including content, advertising, competitive research, SEO, SMM, SEM, and digital PR. Their solution strategy is built to analyze what drives traffic to a company's and competitor's sites, the keywords searched by that traffic, and how effective their marketing strategy is.
SEMR's technology platform, developed more than 13 years ago, utilizes machine learning to combine and analyze both their own copyrighted and third-party data. SEMR's data assets, which increase with more customer engagement, include:
SEMR's product suite collects and analyzes data from various sources and then delivers insights through a singular platform to ensure that companies can efficiently reduce traffic acquisition costs, manage their online visibility effectively, promote consumer engagement on their platforms, acquire new customers, and minimize the cost of managing numerous third-party data vendors.
To market itself and get more customers, SEMR is all about brand promotion. They focus on driving customer demand, creating a strong sales pipeline, and increasing market awareness of their products and solutions. They utilize their own tools to manage their online visibility and reach potential customers. To further build their brand and improve customer engagement, they also use online advertising, webinars, podcasts, blogs, ebooks, customer success studies, and their own Semrush Academy.
Semrush Academy is a free online learning program offering more than 40 courses in three different languages. This program has served more than 450,000 students and issued over 200,000 certificates. This huge population of learners provides SEMR with an opportunity to increase their market awareness. Through its large population of learners, SEMR has gotten ideas on new innovations and how to improve its existing practices. They use this information to improve their offerings, develop new products, and engage with the marketing community, thereby growing their brand.
Once a prospective customer lands on the SEMR site, a low-touch but highly efficient approach is used to move them through SEMR's platform on a self-service model (where you choose what you want). Customers have the choice of either starting on a free trial basis or jumping directly to paid subscriptions. SEMR's sales team works to get existing paying customers to sign up for more subscriptions by helping them see how valuable the SEMR platform could be for their business.
In their report for the third quarter, SEMR disclosed revenue and PF net income that both surpassed the high end of their respective guidance ranges. Taking into account SEMR's exposure to SMBs and the positive effects of a COVID-driven demand pull-forward, the company seems to be doing pretty well based on Q3 results and Q4 guidance. However, there were signs of softness and weakness, which I think led to the cautious guidance.
SMB demand remains strong, according to SEMR, but the company has noticed a rise in scrutiny of deals, especially from larger existing customers renewing, which has led to less upselling and even some downsizing of subscriptions. Even though I think SEMR is fine with the general consensus that growth will be 24% in 2023, I would like to point out that sequential growth decelerated to 5% versus 9% in Q3 last year, and Q4 guidance suggests that sequential growth will be 2.5%. Even though management is confident in their ability to handle the macro environment, the slowing growth rates suggest that growth in 2023 could slow to 20% or less.
Based on my investment thesis, I expect SEMR to grow at a faster rate than the market expects over the next few years until 2025, albeit with a slowdown in FY23. Its forward revenue multiple has been reduced by more than 50% (from 9x to 3.5x) since the beginning of the year. While I believe the sell-off is unjustified on a fundamental level, I believe it is safer to assume it will remain at 3.5x rather than increase back to 9x.
Based on the aforementioned assumptions and 3.5x NTM revenue, I calculated an intrinsic value of $15.21 in FY24. This is an increase of 64% over the current share price of $9.25.
SEMR's platform, products, and solutions rely partly on access to third-party data sources to produce well-informed insights for their customers. They collect the third-party data using their own proprietary data collection techniques. If, by any chance, they lose access to the third-party data, their business will suffer.
If search engines, social networking sites, and other third party data sources change their technology configurations and/or policies regarding use of their platforms for commercial use, SEMR's products that use this data will be less efficient.
SEMR is undervalued at its current share price as of the date of this writing. SEMR presents itself to the market as a holistic market data and insight provider. They provide unbiased and real information on how businesses can improve and manage their online visibility. With the recent massive switch to E-commerce globally, SEMR is yet to achieve its full potential. By providing full-spectrum insights on online visibility, its customer base is set to increase.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.