Please ensure Javascript is enabled for purposes of website accessibility

This Company Has Nearly Doubled Since Its March IPO. Is It a Buy?

By Jamie Louko – Oct 19, 2021 at 5:57AM

Key Points

  • SEMrush provides a comprehensive, unbiased analytics solution to enterprises looking to be visible online.
  • The company has unique traits that have allowed it to lead the industry.
  • Its competitive advantages could allow it to continue expanding in its large market.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

SEMrush has already seen incredible share-price appreciation, but its services are vital to its customers.

Shares of SEMrush Holdings (SEMR -3.89%) -- the online visibility management tool -- jumped 150% from its March IPO by September, before falling back to 100% appreciation today. Other than IPO hype, there has not been any reason for this jump.

The irrationality of this share-price appreciation has left some investors wondering if this software-as-a-service company still has growth ahead of it. Even though it has a market capitalization of just $3 billion, the valuation of 20 times sales worries investors, but its leading solution could provide plenty of growth for the business in the future.

Group of people laughing while on their phones.

Image source: Getty Images.

The importance of search engine optimization

SEMrush's goal is to improve the visibility of its customers online. As people spend more time on their phones and on the internet, they can be overwhelmed with the amount of information and advertising they receive, which can lead to some people blocking this information out. This can lead to difficulties for companies looking to break through the noise and abundance of information online to be visible to their target market. 

SEMrush provides an all-in-one solution for companies to find key insights that allow them to advertise their products efficiently. Its comprehensive solution allows for its customers to advertise on social media, but also employs search engine optimization (SEO) to take a long-term approach to their advertising strategies. While SEMrush's competitors like Moz and Similarweb (SMWB 1.45%) focus on one part of a company's advertising strategy, SEMrush offers a broad range of options to its customers. 

SEMrush offers an unbiased view of its immense data assets -- which include over 20 million domains, 20 billion keywords, and analysis on 1 billion events each day. Unlike Alphabet (GOOG -7.66%) (GOOGL -7.64%) or Facebook (FB), which are incentivized to promote their own advertising channels, SEMrush provides an unbiased, customized view on the best advertising options for its customers. 

Thanks to this comprehensive analysis solution, combined with its vast data sets and unbiased view, the company has become a market leader in numerous marketing technology categories from search advertising to social media management. This leadership has allowed the company to attract many impressive customers including Walt Disney (DIS 0.34%), Salesforce (CRM -0.77%), and eBay (EBAY -1.59%). These customers have also expressed how valuable SEMrush is to their advertising strategies: In Q2 2021, SEMrsuh's net revenue retention was 121%, and its average revenue per user increased 19% from the year-ago quarter. 

The implications of leading an industry

SEMrush's 76,000 customers in over 142 countries have helped the company reach impressive financial performance. Even as a top dog in the industry, the company saw 58% year-over-year revenue growth in Q2 2021, to $45 million. The company has been building on its 50 offering by launching a Keyword Difficulty solution that enables its customers to optimize their SEO marketing efforts.

For the full year, the company expects revenue to reach $183 million, which would mark 47% growth from 2020. The only downside for SEMrush is its profitability. Even after 13 years of operations, the company lost $279,000 in Q2 2021. This was, however, a strong improvement from a net loss of over $2 million one year ago. Free cash flow stands at $9 million so far this year, and with cash balance of over $180 million, a minor net loss is not a dealbreaker for the company. 

What about 10 years from now?

Aside from valuation risk -- which is higher than Similarweb's valuation of 12 times sales -- the company is facing heavy competition. While its analytics platform isn't as unbiased as SEMrush's, Google and Facebook are heavy hitters in this industry, and companies only looking to advertise on those two sites might overlook SEMrush. There's also plenty of competition from smaller pure plays in each respective marketing technology category, and while SEMrush is a leader in many of those spaces, it could potentially lose out to competitors that focus on one specific advertising category. 

What many companies want, however, is an all-in-one solution. Many of SEMrush's enterprise customers are not looking to advertise through one avenue, but through many, and SEMrush provides enterprises with one platform where they can analyze data for all of those advertising strategies. 

SEMrush's vast data assets and comprehensive solution -- which has been shown to be very valuable and successful to have -- are unmatched by its competitors. It's also extremely important to its enterprise customers who are looking for actionable data and insight to make effective marketing decisions.

With a current market opportunity of over $13 billion, this company clearly has tons of potential to expand, and with its unique, hard-to-replicate solution, SEMrush is well-positioned to capitalize on it. Because of this, SEMrush is still worth buying today, even though it has already seen strong share-price growth.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamie Louko owns shares of Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Salesforce.com, and Walt Disney. The Motley Fool recommends eBay and recommends the following options: short October 2021 $70 calls on eBay. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.