Determining where to spend marketing dollars is a challenge that nearly every company deals with. Semrush Holdings (SEMR -2.69%) is one of the leading companies helping businesses effectively maneuver this challenge and reach their target audience through online marketing.
Semrush is based in the United States but has strong ties to Russia and Ukraine. As an executive said in March: "Virtually everyone at Semrush has family or colleagues in Ukraine and Russia, all of whom love and care deeply for one another." About two-thirds of the company's employees are located in Russia and when the war in Ukraine began, some investors were concerned about how well Semrush could operate. The company reduced those concerns recently when it said during its quarterly conference call on May 11 that it would be relocating about 85% of its roughly 800 employees in Russia to different countries.
While this will be a big expense in 2022, here's why it helps make Semrush a more appealing investment.
A major investment
In the May 11 conference call, CEO Oleg Shchegolev said the company plans to wind down operations in Russia by the end of September. "Looking at our performance in the first quarter, it's clear that Semrush is doing well despite all the uncertainty. However, we need to prepare for possible new sanctions and reduce the potential impact on our operations. I believe ending our operations in Russia will not only help us to reduce these risks but help remove the uncertainty for our stakeholders," he said.
One way that it is winding down operations in Russia is by relocating 85% of its employees in Russia to offices in Spain, the Netherlands, Germany, Armenia, Serbia, Cyprus, and the Czech Republic. Semrush plans on paying for nearly everything for them, from travel to relocation bonuses to a higher salary because of the higher cost of living.
This is going to hurt the company's profitability. Semrush anticipates roughly $15 million in one-time relocation expenses, which brings its total projected net loss in 2022 to $45 million. This is an expected net loss margin of 18%, which is much higher than last year's loss margin of 2%.
What does this mean for Semrush?
These actions will result in a big, one-time hit to profitability, but this is for the best. One of the major risks for Semrush was how much it relied on employees in Russia. Considering Semrush is an American company, if sanctions between the two countries made the Russian employees unable to work or communicate with the U.S.-based team, that could have damaged Semrush's operations. As the company relocates the majority of its Russian employees, that takes a lot of uncertainty and risk out of the investment equation.
There are, however, other risks for Semrush. The company provides search engine optimization (SEO) tools to its customers, and if the large search engines were to significantly change their algorithms, that could negatively impact Semrush's effectiveness for customers. However, this is one of Semrush's key focuses in terms of research and development. The company is continuously testing its algorithms to make sure it provides the most accurate search volume measurements to customers. While there is always a risk of search engines changing their algorithms and causing Semrush to stumble, the company seems prepared for whatever could come its way.
Why Semrush is a strong business
While the company's profitability prediction for 2022 seems bleak because of the investment in relocating employees, I believe Semrush is looking stronger than ever. The company is executing on all fronts fundamentally, growing revenue 43% year over year to $57 million in the first quarter. Importantly, the company expects this growth to continue for the rest of the year: It is guiding for 33% full-year top-line expansion.
Despite being the leader in the industry, the company is continuing to innovate and bring the best products to its customers as well. In Q1, the company refined its SEO tools to provide more accurate search volume estimates. This is currently only available in the U.S. and Australia -- two of Semrush's largest markets -- but it expects to deliver these updates to the rest of the world this year. These updated search volume measurements help customers find higher-traffic areas to market toward, which could increase the effectiveness of marketing campaigns.
Even though the company is planning to take a hit to relocate employees this year, it said it could break even on free cash flow in 2023. That would be a decline from 2021, when the company reported a free cash flow of $20 million, but considering this heavy one-time expense the company is going to make, it would be impressive if it could recover so quickly.
On top of innovation and financial success, the company's stock has fallen to an appealing multiple. Semrush shares now trade at just 6.4 times sales, which is the lowest valuation it has had since coming public. The company has been trading publicly for only a little over a year, but up until early 2022, the company was consistently trading above 12 times sales. While it is still early, this valuation looks appealing.
Is Semrush a buy now?
The company still has plenty of room to gain market share in the space. If it can continue dominating the space and attracting customers with its leading products, the company could see continued adoption over the long term. With its low valuation despite continued execution and the large opportunity ahead, I think shares are appealing right now.