Squarespace is a platform that allows anyone to easily build a website through custom domains. The company just released its S-1 filing ahead of its direct listing (similar to an initial public offering but without raising money) on the New York Stock Exchange and will trade under the ticker "SQSP."
Here's what potential investors should understand about Squarespace before it goes public.
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The business
Squarespace's mission is to "enable millions to build a brand and transact with their customers in an impactful and beautiful online presence," which essentially means it wants to help anyone build a good-looking website. The majority of the company's revenue comes from selling annual and monthly subscriptions to its website-building solutions, accounting for almost 95% of sales in 2020. At the end of that year, there were 3.7 million subscribers on Squarespace, up from 3.0 million in 2019.
Historically, Squarespace has focused on website design and layout, but it has since tried to grow its e-commerce product, which is similar to what Shopify (SHOP -2.37%), Wix.com (WIX -2.00%), and BigCommerce (BIGC 0.52%) offer. In 2020, Squarespace processed $3.9 billion in gross merchandise volume (GMV), which was up 91% from the prior year. While Squarespace is growing GMV quickly, it still lags competitors by a wide margin. For instance, Shopify processed $37.3 billion in GMV in just its most recent quarter. Outside of e-commerce, Squarespace has tools for marketing, SEO optimization, blogging, and appointment scheduling that its subscribers can utilize.
Lastly, Squarespace just acquired Tock -- a reservation, hospitality, and order management platform for individual restaurant owners -- for $400 million. According to the S-1, Tock only had $23 million in sales last year, so a $400 million price tag looks expensive. However, if Squarespace can upsell the product to existing subscribers who are restaurant owners, it could meaningfully grow that revenue number over the next few years.
Financials
Squarespace, like other website builders, has a relatively simple business model. Last year, it generated $621 million in revenue, up 28% from 2019. The main inputs into Squarespace's revenue are total subscribers and the average money each subscriber spends in a given year, which it calls average revenue per unique subscriber (ARPUS). In 2020, ARPUS increased from $182 to $187, a good sign for customer retention and spending on the platform.
Moving down the income statement, Squarespace generated $523 million in gross profit, giving it a strong gross margin of 84%. And unlike many tech stocks going public today, Squarespace is actually profitable with $31 million in net income and $150 million in operating cash flow generated last year. With this high gross margin and the fact it can generate cash while still investing in growth, Squarespace showcases how it could have very attractive profit margins once it reaches maturity.
Large public competitors
Squarespace has a few public competitors that I mentioned above, but its closest peer is Wix.com, which also has a comprehensive design and e-commerce solution for its customers. But Shopify is the dominant e-commerce site builder globally, though it doesn't necessarily compete with all of Squarespace's other products. Assuming investors assign a similar price-to-sales multiple (P/S) for Squarespace as they do for Wix, Squarespace would trade at a market cap north of $10 billion following its direct listing.
This is far from guaranteed, however, and if investors have learned anything about public market debuts in the last year, it's that stocks can come out at much higher or lower valuations than initially expected.
Overall, if you're an investor who is bullish on website-building platforms and owns one or more of Shopify, Wix.com, and BigCommerce, Squarespace looks like it could be a complementary addition to your portfolio once it starts trading.
