Shareholders of GoDaddy would probably like to forget the past six months even happened. The stock dropped 42.4% and now trades at $81.67. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in GoDaddy, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think GoDaddy Will Underperform?
Even though the stock has become cheaper, we're swiping left on GoDaddy for now. Here are three reasons why GDDY doesn't excite us and a 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 $1.23 billion in Q4, and over the last four quarters, its year-on-year growth averaged 5.5%. 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 5.7%, a slight deceleration versus its 8.3% annualized growth for the past five years. This projection doesn't excite us and implies its products and services will face some demand challenges.
3. Low Gross Margin Reveals Weak Structural Profitability
For software companies like GoDaddy, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
GoDaddy’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 63.6% gross margin over the last year. Said differently, GoDaddy had to pay a chunky $36.39 to its service providers for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. GoDaddy has seen gross margins improve by 0.6 percentage points over the last 2 year, which is slightly better than average for software.
Final Judgment
GoDaddy falls short of our quality standards. After the recent drawdown, the stock trades at 2.1× forward price-to-sales (or $81.67 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are more exciting stocks to buy at the moment. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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