GoDaddy (NYSE:GDDY) is off to a flying start on the public market. In its first three days of trading, shares have already surged over 30% above the original offer price.
Is this the start of a high-flying growth story, or was the easiest money actually made in the first 48 hours?
Let's have a look.
GoDaddy's rap sheet
First, let me explain what GoDaddy does for a living.
Most consumers probably recognize the brand from its long series of provocative Super Bowl commercials. Starting with World Wrestling Entertainment wrestler Candice Michelle in 2005 and NASCAR driver Danica Patrick the next year, the ads typically feature female sporting personalities who gyrate for the camera while talking about GoDaddy's online business solutions.
Both risky and risqué, this marketing strategy arguably succeeded in setting GoDaddy apart from a plethora of otherwise very similar alternatives in a yawn-inducing market. According to traffic tracker comScore, that first Super Bowl commercial quintupled online visitors to the GoDaddy website. Later that year, GoDaddy passed Network Solutions, a division of Web.com, to become the largest domain name registrar in the world. Sex really does sell, even when your product is far removed from smoky nightclubs and sunny beaches.
I mean, GoDaddy sells online domain names, Web publishing services, and digital security products. If that is not mundane enough for you, it is all geared for a very particular market: small businesses, really tiny companies. GoDaddy takes pride in this fact. On a corporate fact sheet found on the investor relations site, the company calls itself "the world's largest technology provider dedicated to small businesses."
Digging deeper, the company serves up 59 million domain names to 13 million customers. The company aims for "VERY small business owners (VSB), meaning 5 or fewer employees."
That is GoDaddy's emphasis, not mine. It is all about low-cost solutions for a cash-strapped target market, where every dollar saved can help keep the lights on for another month.
Enterprise customers, or even medium-sized businesses, are better served by providers such as Thomson Reuters subsidiary MarkMonitor or IBM unit SoftLayer.
These services offer all the bells and whistles an enterprise-class information technology director might need for managing dozens or thousands of domains, with custom hooks to automate the process via customer-built scripts and applications. Low-cost providers such as GoDaddy make it simple to manage a handful of domain names but trickier to scale way up. The bigger your company gets, the better you would fit with something like SoftLayer or MarkMonitor.
But GoDaddy is comfortable with focusing on the smaller fish, because it is a big ocean. According to company research, there are currently 28 million companies in the U.S. -- and 85% of these have five employees or less. Small revenue streams from millions of customers can turn into big cash flows over time, and that is exactly what GoDaddy is looking for.
By the numbers
GoDaddy has been around since 1997. The company pulled in sales of $100 million in 2005 and passed the $1 billion milestone in 2013. Its customer list has doubled since 2009, and GoDaddy has reported positive operating cash flow since 2001 -- the company is getting some serious business done.
Running in extreme growth mode is not cheap, though. GoDaddy has supplemented its cash flow with additional debt in order to expand this quickly. The balance sheet as of April 1st shows $1.4 billion of long-term debt and only $139 million in cash equivalents.
The IPO will help. All told, GoDaddy will pocket about $500 million in IPO proceeds, taking some pressure off the balance sheet and daily operations.
The company left plenty of money on the table, considering the immediate price surge in the first days of trading. GoDaddy could have priced up to 30% higher per share, but it is not as if the company was trying to go cheap -- that $20 opening price was already above the expected range of $17 to $19.
Moreover, this IPO could be the starting point for a radical makeover of the board of directors. The current setup of nine board members includes two insiders and six appointments from equity firms with big stakes in the company. Only one independent member comes with executive experience from other major technology firms. This investor-heavy composition hardly looks ideal.
What about investors?
IPO investing is always risky.
Sure, GoDaddy has been in business for nearly two decades and can point to some solid results in recent years. The company operates in a stable and growing market and has figured out how to use clever marketing to build its brand. All of these things help.
On the other hand, operating under the scrutiny of public investors is a different ballgame than running a private business. Management suddenly has a new set of priorities to balance, which might not always mesh perfectly with the company vision. For instance, Wall Street might throw a hissy fit if GoDaddy pursues a large, expensive international expansion. Keeping shareholders happy is never easy.
GoDaddy has explored the IPO route before, going so far as filing an application and picking a (different) ticker in 2006. The company got cold feet that time, withdrew the IPO filing, and grabbed a few more equity investors in the meantime. Equity firms Silver Lake Partners and KKR now have major representation on the board, and their interests might not align with the goals of us regular investors.
Finally, IPO launches in the tech sector have been lottery tickets lately. For every GoPro, which temporarily tripled in value three months after its June 2014 pricing, you will find another Coupons.com, which lost nearly half its value in the first two months of trading.
Both of these examples also illustrate how volatile new IPO issues can be, regardless of the direction taken in the early days. The Coupons.com or GoPro lines on this charts would both make an excellent blueprint for a roller coaster:
So there is plenty of meat to chew on here, both good and bad.
GoDaddy is off to a strong start. The business is built on a foundation of single-minded customer recruitment and costly but effective marketing. As long as very small business owners keep tuning in to the combination of low prices and high visibility, GoDaddy should continue to grow.
In the meantime, GoDaddy shares trade at 31 times trailing free cash flow. That is nosebleed territory, giving GoDaddy some big shoes to grow into.
Feel free to explore this high-growth ticker, but be prepared for some nasty surprises as the market figures out how this new thing works.
Anders Bylund owns shares of International Business Machines. The Motley Fool recommends GoPro. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days.