Company: GoDaddy, Inc. (GDDY)
Shop: GoDaddy operates in three segments: domains, hosting and presence, and business applications. The domains business is his previous core business and accounts for about 45% of the company’s sales and is growing at an annual rate of 12.7%. This business has traditionally been the domain registrar’s business, where a customer pays GoDaddy an annual fee for their domain. The actual .com and .net domains are owned by Verisign under an agreement with the government, and GoDaddy pays Verisign a pass-through fee for .com and .net URLs. However, other extensions like .nyc, .co, or .biz don’t pay a routing fee, so GoDaddy can keep all of this revenue. The domains business has also been augmented with an aftermarket business where users can buy and sell domains and GoDaddy handles part of the deal. GoDaddy is by far the leader in domains with around 20 million customers, and on a .com basis, as many domains are registered on GoDaddy as the next 10 competitors put together. The hosting and presence segment accounts for approximately 35% of the company’s sales and consists of two companies, one hosts servers for customers and one is a website builder. This business has been completely rebuilt in the past few years and has recurring revenue of approximately $ 400 million annually on its subscription products and has grown 12.3% annually, with growth of 17% in the most recent quarter. The Business Applications segment accounts for 20% of GoDaddy’s revenue. This business consists of proprietary applications like security, email marketing and other productivity tools for small business and a Microsoft 365 reseller. The Business Applications segment grew by 22.5% per year and continues to offer opportunities to gain market share.
Market value: $ 12.7 billion ($ 76.82 per share)
Activist: Starboard
Percentage ownership: 6.5%
Average cost: $ 70.64
Comment from the activists: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiencies and improving margins. The company also has a successful track record in information technology. It has returned 42.25% in 45 previous engagements over the same period compared to 17.69% for the S&P 500.
What’s happening?
Starboard has acquired a 6.5% stake for investment purposes.
Backstage:
As we often see with Starboard investing, there are different ways to win here and this situation is all about finding the right balance between growth and profitability. The company has invested in growth in recent years, but the market is not convinced that this strategy will work. If the investment pays off and GoDaddy can present itself as a growth company with credible and sustainable growth in the lower tens, the multiple and share price should be re-evaluated to create significant value for shareholders.
When sustained growth is not there, the company can focus on the second chance, margin improvement. Because they spend money investing in growth, they have EBITDA margins in their mid-teens, while their peers are over 30. With their size and product mix, they could achieve higher margins than their competitors.
There is also a possibility of capital allocation. In the past 6 to 7 years the company has made about 30 acquisitions. There is an opportunity to conduct more disciplined mergers and acquisitions and return capital to shareholders. While share buybacks alone aren’t a respectable long-term activist strategy, paired with long-term value-adding strategies is a great way to create additional shareholder value by buying back shares before operational improvements kick in.
These three strategies are not mutually exclusive, nor are they black and white. The key to doing this is getting the right mix of growth and profitability, and that needs to be kept in mind all the time as it is fluid and can change from year to year or quarter to quarter as a company is at this point in its life cycle. For software companies, the rule of 40 applies: growth rate and margins should be 40% or more. This rule is technically not applicable to a company like GoDaddy, but at least analogously. GoDaddy should work to ensure that growth plus margins are above 40%.
Starboard has extensive experience helping companies optimize growth and margins at the board level. The Management Board currently has no shareholder representative on the Management Board. However, it still has a KKR and Silver Lake director from the time the two funds privately floated the company in 2011 and publicly listed again in 2015, though neither fund still owns a share in the company. GoDaddy could benefit greatly from a real shareholder director, especially one with a public market perspective like Starboard’s. Starboard’s window of time to appoint directors is between February 2 and March 4, 2022. Starboard has one month to work with the company on a director appointment agreement if an agreement is not reached by then we expect Starboard to appoint directors.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments. GoDaddy is owned by the fund.
