Squarespace Earnings: Resilient Retention Amid Price Hikes

Squarespace SQSP achieved a solid fiscal 2022 result largely in line with our expectations despite an uncertain macroeconomic environment. Revenue growth of 11% year over year (14% in constant currency) was driven by a continued mix shift to higher-value solutions, like-for-like price increases, and strong retention in the subscriber base. Excluding a one-time goodwill adjustment in the fourth quarter, fiscal 2022 operating margin improved as we expected to 1.5% on reduced sales and marketing spending, even with foreign exchange headwinds and softer gross merchandise volume, or GMV, growth.

For the no-moat firm, we bump our fair value estimate up to $19.60 from $17.00 on both time value of money and more resilience to macroeconomic challenges in the near term than previously anticipated. With 92% of revenue coming from subscription services in fiscal 2022, Squarespace looks to further benefit from price increases over new and existing subscribers as well as further skew toward fast-growing, higher-value commerce solutions. As such, we slightly raise our fiscal 2023 top-line growth forecast to 10.5%, at the low end of guidance and about 130 basis points above our prior forecast. However, with weaker GMV gains weighing on commerce revenue growth and increased investment in product innovation, our 2023 operating margin estimate remains roughly flat.

Over time, we believe competition will limit the firm’s ability to increase prices over the subscriber base, hindering top-line growth and efforts to take share. Further, continued investment for growth and scale through innovation will likely drag on profitability upside. As a result, while we expect some margin expansion, we think the market is too optimistic about the firm’s ability to upsell meaningfully to the existing base and to profitably scale at a rapid pace. Shares currently trade at a hefty premium to our updated valuation.