Squarespace: Google Domains Acquisition Is Value Accretive but Cross-Sell Opportunity Is Limited

We raise our fair value estimate for no-moat Squarespace SQSP 7% to $24 per share as the firm enters a definitive agreement to acquire Google Domains’ assets. While domain registration is commoditized and lower margin relative to Squarespace’s core website building tools, we view the acquisition as a prudent strategy to expand the established domain registrar business and cross-sell complementary online presence solutions to millions of acquired customers at a lower acquisition cost. After the acquisition, we expect Squarespace to become a leading registrar by domain volumes; however, the firm will still be dwarfed by dominant provider GoDaddy, which manages about 84 million domains. The $180 million acquisition will be funded through cash and an extension of existing credit facilities, and we expect the deal to close in the third quarter of 2023 with no regulatory pushback. Despite an improved outlook, Squarespace shares continue to screen as overvalued relative to our updated fair value estimate.

Following the announcement, we raise our long-term top-line growth expectations, partly offset by a softer profitability outlook due to mix shift. We now expect revenue to grow at a CAGR of 16% to 2027, relative to 14% previously, with the acquired domain business contributing approximately $144 million of revenue in 2024, implying an average per year domain price of about $14. Our forecasts assume the acquired base of about 10 million domains grows at low single digits and for domain pricing to grow at midsingle digits, broadly in line with wholesale price increases. Over the same period, we expect operating margins to reach 11%, up from 2% in 2022 and 30 basis points down from our prior forecasts. Our capital expenditure assumptions are unchanged as we assume Squarespace continues to use Google’s infrastructure for the foreseeable future.