Squarespace: Competition Not An Issue, Industry Is Big Enough (NYSE:SQSP)

Recommendation

I believe Squarespace (NYSE:SQSP) has 37% upside. The digital world is becoming increasingly important, with more time and money being spent online as more people connect through desktop and mobile devices. The growth of e-commerce and digital native brands creates demand for web presence and commerce technology, as well as new monetization opportunities through other features. Squarespace’s all-in-one platform allows businesses to have a unified online identity and conduct business across all platforms and social networks, and its simplicity and accessibility make it suitable for even the most complex organizations. Overall, the market opportunity for Squarespace is huge, with the majority of the world’s businesses being SMEs, and the company’s focus on user-friendliness and convenience, as well as its ability to continuously develop and release innovative products and services, positions it well to capitalize on this opportunity and drive growth.

Business

Squarespace is a one-stop-shop for businesses and independent creators to establish a professional online presence, expand their brands, and manage their online operations. They offer web hosting, domain names, online shopping, social media management, marketing, and scheduling features.

Having digital presence is increasingly more important

In recent years, both the amount of time and money spent online has grown as the number of individuals connecting via desktop and mobile devices has risen. As a result of this worldwide shift, businesses and independent artists are quickly adapting their methods of customer interaction.

Consumers now have more online alternatives and avenues of interaction than ever before because to the proliferation of internet use around the world. This has resulted in the rapid transition to the internet by both established enterprises and new forms of creative expression. This trend is exemplified by the rise of “digital native” brands that have developed a strong online presence and can conduct business with their target audience entirely online, bypassing the traditional retail shop.

Consumers expect being able to transact with businesses across digital platforms, including making purchases and signing up for services in addition to interacting with the brands online for research purposes. I believe this will speed up the expansion of international online retail, which Statista predicts will reach $8.1 trillion by 2026. Many new firms, as well as traditional ones that have adapted to the digital era, have sprung up in reaction to the expansion of e-commerce. In my opinion, the expansion of digitally native companies will be spurred by their dedication to user friendliness and convenience, as well as the provision of a uniformly excellent digital experience across all of their available channels.

Market opportunity is huge

Given these long-term tendencies, I see a great chance to help people and businesses flourish by offering a range of services (including online visibility, e-commerce, and promotion). The World Bank estimates that 90 percent or more of the world’s businesses are SME, all of which are prospective clients for SQSP.

The value of the online retail industry is predicted to increase to $8.1 trillion by 2026. It is my opinion that SQSP will be able to sustain its rapid expansion by continually developing and releasing cutting-edge products and services, thereby generating fresh chances to break into the market through novel applications. SQSP’s core web and commerce technology, as well as new monetization opportunities through other features, should benefit from the rise of e-commerce and the increased frequency with which customers trade online.

Finally, I believe that the development of new revenue streams will be fueled by the emergence of the SQSP market opportunity, which in turn will be fueled by the expansion of SMEs and the resulting increase in domestic and international trade.

SQSP simple all-in-one platform

The all-in-one nature of SQSP means that businesses have all they need to establish and maintain a unified online identity and conduct business across all platforms and social networks. Among the many features offered by SQSP is a website builder, e-commerce tools, social media integration, and hosting. Through this all-encompassing method, I believe customers can gain a deeper understanding of their audience, which in turn will lead to increased traffic, revenue, and conversions across all of their solutions.

Moreover, the SQSP platform provides just the right amount of complexity to successfully run even the most intricate organizations. Customers can utilize the SQSP online application or smartphone app to make changes to their website or manage their business on the fly because the platform can be accessed from anywhere.

As a result of these considerations, I have settled on SQSP as the most cutting-edge system available. Also, the SQSP infrastructure is flexible enough to incorporate new communication methods and tools.

Payment revenue to inflect as commerce grows

Since commerce income is expanding at a far faster rate than any other part of the Squarespace product platform, I anticipate that it will play a significant role in driving expansion in the years to come. Strong momentum may be seen in the fact that the platform has handled an annualized $6 billion in GMV as of 3Q22. As for payments, SQSP integrates with Stripe, PayPal, and Square to facilitate customer payments, and uses Stripe itself to handle client transactions.

Total GMV and take rate are the two variables that matter most in this growth equation. For the reasons I’ve already explained, I have no doubt that GMV will keep growing in tandem with the robust secular trend in electronic commerce. In terms of take rate, I have faith that SQSP will grab the chance to generate even more revenue, either through organic increase in take rate or by introducing new, high-value services.

Competitive landscape

SQSP and its rivals, including GoDaddy (GDDY), Wix (WIX), and (to a lesser extent) Shopify (SHOP), are likely well-known. Consequently, this topic calls for an in-depth analysis.

New investors may initially struggle to distinguish between the market’s key competitors. While there are many smaller suppliers located in various parts of the world, Squarespace, Shopify, Wix, and GoDaddy stand out as the major rivals in the market for website and e-commerce solutions for small and medium-sized enterprises. What sets them apart from the competition is the way they go about bringing in new customers. To me, it’s quite evident that the market potential can easily sustain the expansion plans of each of these vendors.

GoDaddy

GoDaddy, the largest domain name registrar in the world, has been a rival in the industry for a long time. That implies a registrar like GoDaddy will likely be used when a new domain name is being purchased. When a customer buys a domain name from GoDaddy, they are presented with the option to upgrade their service with a variety of add-ons, including website hosting, website builder tools, and even business programs like Office365. GoDaddy’s infrastructure is popular among domainers because it makes it easy to register and transfer ownership of multiple domain names at once. In order to stay competitive with industry leaders like Wix and Squarespace, GoDaddy has made significant investments over the years in what it calls Websites and Marketing solutions for website construction and marketing.

It is clear that GDDY has a very strong presence at the top of the funnel (i.e., SEO). Hence, so long as SQSP continues to gain mind-share in users, it should be able to deter competition from GDDY.

Wix

GoDaddy isn’t the only company that sees potential here; Wix has invested as well. Wix began introducing e-commerce capabilities by leveraging technologies like Magento for e-commerce in mid-2012 but didn’t implement e-commerce functionality into the Wix Store until the very end of 2014. This was an entire year later after SQSP first introduced its Commerce suite of products and its integration with Stripe for accepting online payments. I think SQSP has an advantage here owing to being the initial entrant in the market. However, the fact that the gap in quality between their products seems to be narrowing, though, worries me.

Shopify

Shopify is a popular choice for businesses that have complicated e-commerce demands such a big number of stock-keeping units (SKUs), the desire to integrate with numerous marketplaces, and the requirement to manage inventory. The markets for SQSP and SHOP seem to me to be distinct. Many small business owners lack the technical expertise necessary to make full use of SHOP’s more advanced features. From my few contacts with SQSP customers, I gather that many opted for Squarespace over Shopify because they lacked confidence in their ability to quickly deploy an e-commerce website on the latter’s platform.

Valuation & model

I believe SQSP is worth about 37% more than it is currently being traded for. However, I expect the company’s revenue to slow down in the coming fiscal year due to unfavorable economic conditions, which is inline with guidance. That being said, I expect revenue to bounce back and grow faster in the following fiscal years as the economy recovers.

Right now, SQSP is being traded at a relatively low multiple of forward revenue, close to its all-time low. I believe the low valuation today is warranted given the weak growth prospect in the near-term. However, as growth reaccelerates, or profits increase faster than expected, we could see an inflection in multiples. Till then, I believe the current valuation multiple will remain.

Risks

Execution is incredibly important in this competitive space

Execution is a significant uncertainty when it comes to software. For businesses that are experiencing rapid growth, a decline in sales performance often leads to a decrease in profits and a decrease in the value of their stock. Squarespace has been in operation since 2003, but as a publicly traded company, it is still relatively new and management may feel pressure from shareholders to pursue other initiatives to appease them.

Customers churn because SQSP can no longer satisfy them

There is a danger in emphasizing simplicity and use since clients may see products from companies like Shopify as the natural progression for their business. In comparison to Squarespace, Shopify has the potential to attract new businesses by lowering the technological barriers to entry for new consumers. This is because Shopify is seen as giving the resources needed to grow and scale enterprises for a longer length of time.

Summary

Squarespace, in my opinion, has the potential for a 37% increase in value. The rise of e-commerce and digital native brands fuels demand for web presence and commerce technology, as well as new monetization opportunities via other features. Squarespace’s emphasis on user-friendliness and convenience, as well as its ability to develop and release innovative products and services on a continuous basis, positions the company well to capitalize on this opportunity and drive growth.