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Value Investors: Rapid Growth, Loss Making, And Cash Generative

|Includes: GoDaddy Inc. (GDDY)

Summary

Godaddy Inc trades at 15 times it's 2017 unlevered cash-flow

and has grown free cash-flow by 420% in the last 5 years

meanwhile operating losses has provided a shield from corporate taxes

Every month Reid Green & Co subscribers get access to new investment candidates, which are potentially being severely undervalued by the market. 

We identify and examine dozens of investment possibilities and only highlight the most compelling ideas, which carry significant upside, with relatively muted risks.  

Some subscribers use these ideas to construct a diversified portfolio, while others use them as a starting point for more careful study. 

In June 2017 we highlighted Godaddy Inc to our subscribers as a strong investment candidate. 

About the Company

GoDaddy Inc. is a technology provider to small businesses, Web design professionals and individuals. The Company delivers cloud-based products and personalized customer care. It operates a domain marketplace, where its customers can find the digital real estate that matches their idea. It provides Website building, hosting and security tools to help customers construct and protect online presence. It provides applications that enable connecting to customers and managing businesses.

Our Assessment

GoDaddy Inc is an American publicly traded internet domain registrar and web hosting company. The company was founded by entrepreneur Rob Parsons in 1997 and has since received backing from private equity and VC firms KKR, Silver Lake, and Technology Crossover Ventures. In 2013, GoDaddy was reported as the largest internet domain registrar in the world, at a size four times larger than its closest competitor.

With a $7 billion market value, a knee jerk reaction could lead one to conclude that GoDaddy Inc is another overvalued tech darling, as it posted a $22 million loss in its 2016 full year results. To make matters worse (from a headline perspective) the company hasn’t reported a profit since 2009. However further reflection on the company’s results tells a different story, and may put the company’s consistent loss reporting into perspective.

In 2011 the company posted revenues of $894 million, which has been on an uninterrupted growth path to its 2016 revenues of $1.85 billion. This represents an increase of 106%, or 20% compounded per annum. Interestingly in 2011 the company reported a loss of $324 million which has shrunk every year down to $22 million in 2016.

Although revenue has grown 106% in the last 5 years, the company’s operating expenses has only risen 48% during the same period. This implies that the company growing its revenue and customer base, doesn’t simultaneously require them to increase their overheads at the same pace. This means that the larger the company’s revenue, the more of it converts into profit. This would explain why their increase in revenue and reduction of operating losses seem to be synchronised.

This concept is known as operating leverage, and also means that if the company continues to grow its revenue faster than its overheads, an ever increasing amount of the revenue will become profit over time.

Having said all of that, like a good novel the story actually gets better. While the company has been consistently reporting accounting losses, its cash generation experience has been quite the opposite. In 2011 GoDaddy’s cash generated from operations and free cash flow was $106 million and $62 million, and again saw uninterrupted growth to $386 million and $323 million in 2016.

This represents a growth of 264% and 420% respectively. The company it is on track to generate between $465 million and $485 million in free cash flow for the 2017 full year, representing another year of growth. Over the years the losses the company reported has actually been shielding it’s enormous and growing cash flow from taxes, allowing it to re-invest the tax saving into its growth.

Our Perspective

While this does not constitute a personal recommendation or investment advice, Reid Green & Co looks at GoDaddy Inc as a potentially attractive investment opportunity. A cause for concern is because the company trades a 15 times its 2017 free cash flow, one would need to be certain that the company can continue its growth path.

This by no means exhaustive research, as one needs to consider factors such as their latest acquisition of HEG which will increase net debt from $400+ to $2 billion+. But it certainly provides a good starting point for further research and deeper analysis on the company’s future growth prospects to justify today’s price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.