If you've been on any social media site, then you're likely familiar with Squarespace (SQSP 3.71%), a platform provider for businesses and creators to develop an online presence. It advertises the heck out of its business and sponsors some of the biggest influencers on social media.
Yet it's more than Squarespace's familiarity that makes it my favorite tech initial public offering (IPO) so far in 2021. With loads of advertising and appeal to online business development, this company could be a great investment for today's investors. Its business possesses qualities that too few newly public companies do, regardless of their industry. Read on to find out what those are.
Was Squarespace ready to go public?
Squarespace came to the public markets in May via a direct listing, a method that allows companies to sidestep the traditional financial institutions that run IPOs and lets insiders, shareholding employees, and early investors sell their stock directly to the public.
But it was an ignominious debut. Squarespace opened for trading at $48 per share and ended its first day of trading on the New York Stock Exchange at just above $43 a share, a 13% decline from its $50 per share reference price.
While shares did manage to climb to almost $65 per share in the weeks afterward, Squarespace stock has fallen 37% from those highs and now trades below where it closed that first day.
For a business growing as Squarespace is, it seems a mistake on the part of the market to cast it aside on inflation jitters amid a spate of tech IPOs. Market players fearing inflation effects avoided investing in high-growth tech stocks. Taking advantage of the market's blunder could be an opportunity for smart investors.
Squaring its stock price to its business potential
Squarespace is growing fast. It sports 3.9 million unique subscriptions, 15% more than last year and 5% higher than it had at the end of 2020. That's significant because that figure doesn't mean the total number of websites, rather it includes customers with a stand-alone scheduling subscription, social service, or hospitality account. So if someone has subscriptions for a website, a domain, and a Google Workspace that counts as one unique account.
The average revenue per subscriber rose 6% for the period, to $193. Over the last two years, total revenue has grown at a 28% rate. Last quarter revenue was up 31%, hitting $196 million, with subscription revenue accounting for 94% of the total.
Part of the reason for its growth is that it takes something very complicated -- website design -- and makes it incredibly easy for the end-user to create. The all-in-one interface not only allows for an online presence but provides for an e-commerce option as well. Users seem to be responding to its ability to offer a domain, website, email, and storefront all with drag-and-drop functionality at a reasonable cost.
It reported a loss in the second quarter of $234.5 million compared to a profit of $18.5 million last year, but that's because the costs associated with going public are included in the generally accepted accounting principles (GAAP) numbers. Back out those figures and Squarespace had adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, of $42.6 million, up from $39.5 million a year ago. The company was even able to report free cash flow of $10 million.
Squarespace has been consistently profitable and last year generated a net income of $30.6 billion. The company also reported free cash flow of $95 million in 2019 and over $152 million in 2020.
This is a rapidly growing company, producing large sales and profits, and it anticipates this level of growth will continue. Revenue is expected to increase on average 25% with free cash flow of between $102 million and $116 million.
There's more opportunity with small businesses
While Squarespace is best known for its website templates, it also offers hosting services and e-commerce transaction capabilities, similar to services provided by Shopify (SHOP -0.78%), Wix.com (WIX -1.86%), and BigCommerce.
The all-in-one nature of its platform offers small and medium-sized businesses and independent creators the opportunity to create, build, and manage their online presence and persona.
Squarespace says there are approximately 800 million small and medium-sized businesses and self-employed people globally, 46% of whom are not even online yet. This provides it a total addressable market of around $150 billion for the near- and medium-term, giving it a large, untapped market that it can onboard efficiently and profitably.
Spending on e-commerce software applications is expected to grow from $6.3 billion in 2020 to $7.3 billion in 2024. It gives Squarespace the chance to unlock new opportunities to monetize its platform, such as its recent acquisition of Tock, a restaurant-focused reservation, hospitality, and order management platform. Purchasing Tock allows Squarespace to expand its hospitality offerings to accelerate sales, provide greater marketing integrations, and connect directly with its customers.
Squarespace faces competition but is still a winner
Squarespace has done its business right. Unlike many companies before it, the website provider nurtured its business in private, waited until it had a business that was successful in terms of sales and profits and then went public.
As previously noted, it does have stiff competition. Wix, for example, is a bigger rival, more than twice the capitalization of Squarespace's $5.8 billion market value, while Shopify at $184 billion dwarfs it. Yet where the former trades at 10 times sales and the latter 48 times, Squarespace goes for around 8 times sales.
The sector will keep growing, and despite the sell-off in tech stocks, Squarespace's leading position and deeply discounted shares make it my favorite tech IPO this year.