Company: GoDaddy, Inc. (GDDY)
Business: GoDaddy operates in three segments: Domains, Hosting and Presence and Business Applications. The Domains business is its legacy core business and makes up approximately 45% of the company’s revenue and has been growing by 12.7% per year. This business was traditionally the domain registrar business, where a customer pays GoDaddy a yearly fee for their domain. The actual .com and .net domains are owned by Verisign through an agreement with the government and GoDaddy pays a pass-through fee to Verisign for .com and .net URLs. However, no pass through fee is paid on other extensions like .nyc, .co or .biz., so GoDaddy can keep all of this revenue. The Domains business has also been augmented by an aftermarket business in which users can buy and sell domains, and GoDaddy takes a piece of the transaction. GoDaddy is by far the leader in Domains with approximately 20 million customers and on a .com basis, they have as many domains registered on GoDaddy as the next 10 competitors combined. The Hosting and Presence segment makes up approximately 35% of the company’s revenue and is comprised of two businesses, one that hosts servers for clients and one that is a website builder. This business was completely rebuilt in recent years and has approximately $400 million in annual recurring revenue through its subscription products and has been growing by 12.3% per year with 17% growth in the most recent quarter. The Business Applications segment makes up 20% of GoDaddy’s revenue. This business is comprised of homegrown applications such as security, e-mail marketing and other productivity tools for small businesses and a Microsoft 365 reseller. The Business Applications segments has been growing by 22.5% per year and continues to have opportunities to gain market share.
Stock Market Value: $12.7B ($76.82 per share)
Activist: Starboard Value
Percentage Ownership: 6.5%
Average Cost: $70.64
Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. The firm also has a successful track record in the information technology sector. In 45 prior engagements, it has a return of 42.25% versus 17.69% for the S&P 500 over the same period.
Starboard acquired an 6.5% position for investment purposes.
Behind the Scenes:
As we often see with Starboard investments, there are a few different paths to win here, and in this situation, it is centered around finding the right balance between growth and profitability. Over the past few years, the company has been investing for growth, but the market is not convinced that this strategy is working. If the investment pays off and GoDaddy can show itself to be a growth company with credible and sustainable growth in the low teens, the multiple and stock price should re-rate creating material value for shareholders.
If the sustainable growth is not there, the company can focus on the second opportunity which is margin improvement. Since they are spending money on investing for growth, they have EBITDA margins in the mid-teens while their peers are above 30. With their scale and product mix, they could achieve margins higher than peers.
There is also a capital allocation opportunity. Over the past 6 to 7 years, the company has made approximately 30 acquisitions. There is an opportunity to have more disciplined M&A and return capital to shareholders. While share buybacks on their own are not a respectable long-term activist strategy, in conjunction with long-term value-creating strategies, this is a good way to create additional shareholder value by buying back stock before the operational improvements set in.
These three strategies are not mutually exclusive nor black and white. The key is to have the right mix of growth and profitability, and that is something that needs constant attention as it is fluid and can change from year to year or quarter to quarter when a company is at this point in its life cycle. There is a rule of 40 for software companies: Growth rate and margins should equal or exceed 40%. That rule is not technically applicable to a company like GoDaddy, but at the very least, it is analogous. GoDaddy should be working to have growth plus margins exceed 40%.
Starboard has extensive experience in helping companies optimize growth and margins from a board level. The board does not currently have a shareholder representative on the board. However, it still has a KKR and Silver Lake director from when the two funds took the company private in 2011 and back public in 2015, even though neither fund still owns one share of the company. GoDaddy could benefit greatly from a true shareholder director, particularly one with a public market perspective like Starboard’s. The window for Starboard to nominate directors is between Feb. 2 and March 4, 2022. Starboard has a month to work with the company on an agreement to add directors and if an agreement is not reached by then, we expect Starboard to nominate directors.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. GoDaddy is owned in the fund.