Squarespace Stock: Trading at a Healthy Discount (NYSE: SQSP)
The following segment is excerpted from this fund letter.
New investment in Squarespace
A recent investment we made is in Squarespace (NYSE: SQSP). Squarespace offers a do-it-yourself website product, along with some ancillary products, including marketing and analytics tools and domain registrations. Instead of hiring a traditional website developer and paying thousands of dollars for a website, most people can use templates and drag and drop to create a professional-looking website for just $12 a month. . They offer websites for all types of businesses including e-commerce, restaurant reservations, paid content section, appointments, etc.
Wix and Squarespace are the industry leaders. Since they have 5x more subscribers than their peers, they can spend a lot more on research and development in order to deliver a superior value proposition. Squarespace recently acquired a restaurant reservations platform, as well as social media management tools to bolster its value proposition. I see no reason for a potential customer to choose the platform with an inferior product offering, especially when the prices are similar across the board. Also, once a user creates a website and it is up and running, they are unlikely to switch and spend time recreating their website on a new platform. This creates customer captivity and long-term values. Both companies also target third-party developers to use their platforms to build websites for their clients. Squarespace even allows adding custom code for more advanced users to get additional functionality.
Anthony Casalena is the founder and CEO of Squarespace. He started Squarespace while in college and has been running it ever since. He owns about a third of the outstanding shares and seems very knowledgeable and passionate about his business. Looking at their Glassdoor, 88% of people approve of the CEO, and their overall rating is 4.1 out of 5. They recently hired a product manager with 15 years of experience at Adobe and a new CFO with experience at Booking Holdings. (NASDAQ: BKNG).
When it comes to rating, the main revenue drivers are number of subscribers and average revenue per subscriber. I predict about 500,000 new subscribers per year over the next five years, which will lead to about 6.5 million subscribers by 2026. I think a lot of subscriber growth is related to new training sales, which have only increased in recent years in the United States, I also expect ARPU to grow into the single digits. Adding them up, I get a growth rate of about 13% for the next five years for revenue. I also assume that steady-state operating margins will be around 30% once growth in sales and marketing spend slows. That gives me an intrinsic value of around $50 per share, compared to the current market price of around $30 per share, a healthy discount and a decent internal rate of return.
Some risks to consider for the thesis are excessive competitive pressures from Wix, leading to pressures on ARPU. Also, they rely heavily on S&M to grow, and these new Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) the changes could hurt the return on investment of advertising spend and increase customer acquisition costs. However, Wix said 50% of their traffic is organic, I’m not sure of the figure for Squarespace, but if it’s similar it would mean they’ve created strong brand recognition. Another risk is companies like Google and Meta Platforms / Facebook (NASDAQ:FB) make websites less important. Google provides basic business information, lets users make reservations, and even includes reviews. However, I still think a website is important for almost any business, and considering the low cost, it’s still a great investment.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.