Most representatives of small and medium-sized businesses nowadays are faced with the need to create their own website in order to successfully compete with larger market players. This allows you to increase sales and improve operational efficiency. Small restaurants, shops, workshops, pastry shops and other representatives of offline commerce are widely represented on the network. This process was accelerated by the coronavirus pandemic, when it became impossible to accept orders and sell goods in the traditional way. The e-commerce sector began to develop rapidly.
Company SquareSpace, which helps small and medium-sized businesses build websites, has applied for a direct listing (DPO) on the NYSE. The shares will be traded under the ticker “SQSP“and the placement will take place on May 19. Let’s talk more about the company’s business.
SquareSpace was founded in 2004 and is headquartered in New York. It started out as a Saas platform for building websites, but has gradually been supplemented. The last major platform update took place in 2012. SquareSpace’s offering so far includes:
- Tools for building a complete website.
- A blog site.
- Web hosting.
- Internet marketing, corporate email and SEO optimization services.
The platform is easy to manage and helps millions of clients from 180 countries around the world to create a website with a unique design without the need for programming skills. Mostly, the company operates in the B2B segment.
The company’s clients receive the following benefits:
- Positioning in the network. SquareSpace customers can create a professionally designed website for themselves, buy a domain and arrange social media pages. The company invested in design teams to develop original design templates.
- Commercial tools. The company’s services are used by small online stores and marketplaces. SquareSpace provides the entire infrastructure for order processing and payment acceptance.
- Marketing. Thanks to the company’s solutions, customers can conduct e-mail mailings, communicate with users and conduct search engine optimization. SquareSpace analytics tools help you manage sales, conversions, and traffic.
SquareSpace sells by subscription. At the time of its listing on the exchange, the company had 3.7 million customers, and the number of subscribers doubled in 2020. All this was reflected in the financial results of the company and the growth of its market share. We will talk about this in more detail below.
Market and competitors SquareSpace
According to research International Data Corporation the market of Saas platforms almost tripled from 2016 to 2019 – up to 233.4 billion USD. By 2025, it can reach volumes of 456 billion USD. The basis of the company’s address market is made up of individual entrepreneurs who are classified as small and medium-sized businesses.
According to the Kauffman Index, 540,000 new entrepreneurs are registered every month in the United States alone. In total, according to SquareSpace, there are more than 800 million entrepreneurs in the world, 46% of which, according to Clutch, are not represented on the Internet in any way.
The company’s platform is well suited for creating your own online store. In this regard, the study Statista, according to which this year the number of buyers on the Internet worldwide will reach 2.1 billion people. Businesses will strive to meet this demand, which will accelerate the growth of SquareSpace’s subscribers.
Therefore, the company has great potential for multiple sales growth.
SquareSpace’s main competitors are:
- Shopify (NYSE: SHOP).
- Wix (NASDAQ: WIX).
Financial performance of the company
SquareSpace, unlike other technology companies, generates net profit, so in addition to revenue, we will analyze this indicator as well. The company in the S-1 / A form provided additional data for the first quarter of this year.
Net profit at the end of 2020 amounted to USD 30.59 million, which is a 47.39% drop compared to 2019. In 2019, this indicator was equal to USD 58.15 million, an increase compared to 2018 was 34.86%. The drop in bottom line was driven by higher marketing and research spending.
The company’s sales in 2020 – 621.15 million USD, growth by 2019 – 28.14%. In 2019, this indicator reached 484.75 million USD, which gave an increase of 24.34% compared to the result of 2018. The average annual revenue growth is 26.23%. Thus, the company can be classified as a fast-growing one. For such business representatives, revenue is a more important indicator.
70% of the company’s total sales are made in the United States, but the share of other countries in the revenue is growing every year. If this dynamics continues, the US share may drop to 50%, which will contribute to business diversification and increase its resilience.
SquareSpace’s gross profit in 2020 compared to 2019 increased by 29.87%, to 522.81 million USD. In 2019, sales increased by 26.01% compared to 2018, to USD 402.84 million. With the reduction of marketing and new research costs, the likelihood of an increase in net profit is high. As you can see, gross profit grows in proportion to revenue.
Strengths and weaknesses of SquareSpace
When the picture of the business model has taken shape, we can analyze the pros and cons of investing in SquareSpace securities. The advantages of the company include the following factors:
- SquareSpace operates in the promising Saas platform market.
- The company’s product is versatile and meets the needs of potential customers.
- The company’s revenue growth rate exceeds 25%.
- The company generates net income.
- Strong management.
- The transnational nature of business.
Risks of investing in SquareSpace stocks:
- Unstable net income, the company does not pay dividends.
- The presence of strong competitors, any mistake can lead to a noticeable drop in the number of subscribers.
- The company’s business has grown under the influence of the coronavirus pandemic, and this positive effect will gradually decrease.
Direct listing details and SquareSpace capitalization estimate
During the last round of financing, the company raised USD 300 million. The placement will take place through a direct listing (DPO) rather than a classic IPO, so there is no price range. SquareSpace plans to sell 40.2 million Class A shares. The company last sold such shares in 2019 at a price of USD 24.52.
Financial advisors of the placement were: Citizens Capital Markets, RBC Capital Markets, Goldman Sachs, Citigroup, KeyBanc Capital Markets, Mizuho Securities USA, Piper Sandler and BofA Securities.
To assess the potential capitalization of a company, we use the P / S ratio (multiplier) (capitalization / revenue). SquareSpace’s competitors have an average P / S of 27.5. Thus, the company’s potential capitalization may reach 17.05 billion USD (27.5 * 0.62 billion).
Considering the pace of business growth and the prospects for the company’s target market, I recommend SquareSpace shares for medium-term investments.
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