Although the price of this stock has fallen significantly since it went public, revenue growth has remained steady.
Initial public offers (IPO) were absolutely booming in 2021 and early 2022, but during the past 12 months, the market has completely turned around. That is what takes place during the bursting of a historic speculative bubble.
The majority of businesses that went public in 2021, particularly those in the space economy and electric vehicle industries, turned out to be houses of cards with unreliable management teams. However, among the 2021 and 2022 IPO classes, there are a few stocks that I believe are undiscovered gems.
One of these is Squarespace (SQSP -1.27%), a tool for individuals and small businesses to build websites online. Here’s why I think this business will make a good investment in April’s technology IPO.
Anthony Casalena, the company’s creator and current CEO, founded Squarespace in a college dorm room in 2003. Over the past 20 years, Squarespace has slowly grown to become one of the industry leaders in website construction. The platform makes it simple for everyone, even those without computer science expertise, to establish an online presence by providing individuals and businesses with templates for creating websites and blogs.
Squarespace provides its clients with commerce features in addition to simple website templates. These include of online shops, payment processing, scheduling appointments, and restaurant management.
In essence, Squarespace intends to serve as its clients’ digital and payment infrastructure. The number of subscribers to the company’s various products is a crucial measure for investors to monitor since it is how it primarily generates revenue. By the end of 2022, Squarespace had 4.2 million unique memberships, nearly twice as many as in 2018, and rising 3% year over year.
Continual expansion and a strong secular tailwind
Disregarding the COVID-19 period, when small firms looking for online tools gave subscriptions a one-time boost, Squarespace has consistently increased the number of subscribers over the past eight to ten years. Its average revenue per subscription has increased along with the number of customers, reaching $209 in 2022 from $178 in 2018.
Customers of Squarespace use its ancillary products more frequently and spend more money on the website builder. This shows that the company is adding value to them year after year.
Squarespace has reportedly risen far more quickly than the total content management system (CMS) market, with its proportion of websites expanding from 0.2% in 2012 to 3.1% in April 2023, according to independent experts W3 Techs. In recent years, it has become increasingly popular to create websites using vertically integrated platforms like Squarespace, Shopify, and Wix.com. If this pattern holds, Squarespace’s market share might double over the following 10 years, resulting in steady revenue growth for many years to come.
Valuation? not too insane
Squarespace made $867 million in revenue in the last year while expanding 11%. Squarespace is genuinely profitable, bringing in $166 million in free cash flow in 2022, unlike its rivals Wix and Shopify. Even if the business is still making significant investments in the future for expansion, that represents a free-cash-flow margin of 19%.
The stock trades at a somewhat higher earnings multiple at its current market cap of $4.4 billion, which results in a price-to-free-cash-flow (P/FCF) ratio of 26.5. However, I believe that with margin expansion and steady revenue growth, this earnings multiple might swiftly decline. If Squarespace can increase its free cash flow margin to 25% and grow its revenue by 10% yearly over the next three years, it will be producing $289 million in free cash flow annually, or a forward P/FCF of just 15, based on its current market capitalization.
Squarespace is an easy IPO company to buy right now and hold for many years in the future because of a long-term secular tailwind and a comparatively low valuation.