GoDaddy has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 19.7% to $96.72 per share while the index has gained 15.2%.
Is there a buying opportunity in GoDaddy, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think GoDaddy Will Underperform?
We’re cautious about GoDaddy. Here are three reasons why there are better opportunities than GDDY, 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 $1.36 billion in Q2, and over the last four quarters, its year-on-year growth averaged 6.2%. 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 5.2%, a slight deceleration versus its 7.5% annualized growth for the past five years. This projection doesn’t excite us and suggests its products and services will see some demand headwinds.
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 63.8% gross margin over the last year. Said differently, GoDaddy had to pay a chunky $36.20 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 years, which is slightly better than average for software.
Final Judgment
We cheer for all companies solving complex business issues, but in the case of GoDaddy, we’ll be cheering from the sidelines. That said, the stock currently trades at 2.4× forward price-to-sales (or $96.72 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d suggest looking at one of our all-time favorite software stocks.
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