The market for initial public offerings (IPOs) went from an absolute bonanza in 2021 and early 2022 to a complete 180-degree turnaround the last 12 months. That's what happens during the rise and subsequent pop of a historic speculative bubble.
Most of the companies that went public during 2021 -- especially within the electric-vehicle and space-economy sectors -- turned out to be houses of cards with untrustworthy management teams. However, there are a few stocks I think are diamonds in the rough among the 2021 and 2022 IPO classes.
One of them is Squarespace (SQSP 2.61%), an online website-building platform for individuals and small businesses. Here's why I like this company as a solid technology IPO to buy in April.
What is Squarespace?
Started in a college dorm room in 2003 by Anthony Casalena -- the founder and current CEO of the company -- Squarespace has steadily become one of the leaders in website building over the past two decades. The platform offers individuals and businesses templates for building websites and blogs, making it easy for anyone, even those without computer-science expertise, to have an online presence.
On top of basic website templates, Squarespace offers commerce tools to its customers. These include e-commerce stores, payment processing, appointment bookings, and restaurant management.
Essentially, Squarespace wants to be the digital and payments backbone for its customers. It mostly makes money through subscription tiers for its various products, meaning that a key metric to track for investors is the company's total level of subscribers. At the end of 2022, it had 4.2 million unique subscriptions on Squarespace, up 3% year over year and almost double from 2.3 million in 2018.
Consistent growth and long secular tailwind
Disregarding the COVID-19 period when subscriptions got a one-time boost from small businesses looking for online tools, Squarespace has put up consistent subscriber growth over the last decade plus. Along with customer growth, it has grown its average revenue per subscription, hitting $209 in 2022, up from $178 in 2018.
Squarespace's customers increasingly adopt its add-on products and spend more money with the platform. This indicates the company is providing more and more value to them each year.
According to third-party analysts W3 Techs, Squarespace has grown much faster than the overall content management system (CMS) market, with its share of websites growing from just 0.2% in 2012 to 3.1% in April 2023. There's been a secular trend for websites to be built with vertically integrated systems like Squarespace, Shopify, and Wix.com in recent years. If this trend continues, Squarespace could double its market share over the next decade, leading to consistent revenue growth many years into the future.
Valuation? Not too crazy
Over the last 12 months, Squarespace generated $867 million in revenue and grew 11%. Unlike its peers Wix and Shopify, Squarespace is actually profitable, generating $166 million in free cash flow in 2022. That's a free-cash-flow margin of 19%, even though the company is still reinvesting heavily for growth.
At its current market cap of $4.4 billion, the stock trades at a slight premium earnings multiple that amounts to a price-to-free-cash-flow (P/FCF) ratio of 26.5. However, I think this earnings multiple can come down rather quickly with margin expansion and consistent revenue growth. If, over the next three years, Squarespace is able to grow its revenue by 10% annually and expand its free-cash-flow margin to 25%, it will be generating $289 million in free cash flow a year, or a forward P/FCF of just 15, based on the current market cap.
With a long-term secular tailwind and a relatively cheap valuation, Squarespace is an easy IPO stock to buy right now and hold for many years into the future.
