GoDaddy Earnings: Aftermarket Damps First Quarter, but We Expect Turnaround Before Year-End

We maintain our $87 fair value estimate for no-moat GoDaddy GDDY following a mixed first-quarter 2023 result. Topline growth fell short of our expectations as lumpy aftermarket revenue, foreign exchange headwinds, and a disposal of assets in the hosting business dragged on the result. Nonetheless, we are optimistic about a recovery over the course of the year as headwinds abate, and we maintain our full-year and long-term forecasts. At current prices, GoDaddy shares trade at an attractive 20% discount to our unchanged valuation.

First-quarter revenue increased 3% year on year, led by a higher than expected 12% increase in revenue from website design, email, and commerce solutions to 33% of total revenue. This was once again offset by softer growth in the aftermarket business cycling large transactions in the prior period and lower hosting revenue. Average revenue per user increased 4% year on year, supported by healthy sequential growth in gross payment volume on GoDaddy’s integrated payment platform. While we’ve previously feared that customer switching costs and inertia would limit GoDaddy’s ability to upsell, early indicators suggest the competitively priced payments offering is gaining traction among existing customers.

Despite softer than expected revenue growth during the quarter, GoDaddy achieved year-on-year profitability gains with adjusted EBITDA margins expanding 160 basis points to 24%. This improvement was aided by a pullback in marketing spend amid uncertain macroeconomic conditions, a mix shift to higher margin commerce solutions, and platform integration efficiencies. An increasing skew to stickier commerce solutions is beneficial for client retention; however, this has been partly offset by higher attrition in the hosting business following planned platform migrations.