Once per quarter, the S&P 500 index undergoes a rebalancing. Essentially, this is a list of requirements companies must meet to be eligible and maintain their status as a member of the S&P 500. The quarterly rebalances ensure that new companies enter the index while replacing businesses that have fallen out of eligibility.
One company that was just added to the S&P 500 is website and e-commerce specialist GoDaddy(NYSE: GDDY). Admittedly, I always viewed GoDaddy as somewhat of a commoditized business that was known for creative (if not controversial) television commercials featuring celebrities, models, and professional athletes. However, over the years, the company has quietly built an impressive operation. What's even better is the stock looks like an absolute bargain right now.
Let's dig into GoDaddy's business and explore why this new member of the S&P 500 is a no-brainer opportunity.
GoDaddy's business is strong, and...
The table contains a number of important financial metrics for GoDaddy, as reported in the company's first-quarter earnings report (ended March 31).
| Category | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Applications and commerce revenue | $383 million | $338 million | 13.3% |
| Core platform revenue | $725 million | $698 million | 3.9% |
| EBITDA margin-Applications and commerce | 42.3 % | 39.2 % | 310 basis points |
| EBITDA margin-Core platform | 29.9 % | 27.1 % | 280 basis points |
Data source: Investor relations. Table by author.
As the table shows, GoDaddy generated $1.1 billion in total revenue during the first quarter -- up 7% year over year. While this level of growth may not catch your eye, the company's overall profile is what I find most encouraging.
Both of GoDaddy's core operating segments are highly profitable and accelerating their margins on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis. This margin expansion is flowing directly to the bottom line. For the quarter ended March 31, GoDaddy's free cash flow increased 26% year over year to $327 million.
...more growth could be on the horizon
One of the more interesting metrics that stood out in GoDaddy's first-quarter earnings report was total customer count. As of March 31, the company boasted 20.9 million total customers -- essentially flat year over year.
Although this may look concerning on the surface, I think that there are two subtle ideas to keep in mind. First, GoDaddy was still able to generate respectable revenue growth and profit expansion during the first quarter despite a flat customer base. This implies that the company's existing user base is sticky.
Moreover, considering average revenue per user (ARPU) rose 5% year over year during the first quarter, it's more likely than not that GoDaddy is doing a good job cross-selling multiple products to its customers.
Another idea to keep in mind about GoDaddy and its growth prospects is to think about the broader economy. It's no secret that for the last couple of years, macro factors including inflation and rising interest rates have been at the center of attention for economists and investors. With that said, two other demographics that are highly impacted by inflation and borrowing costs are business owners and consumers.
Over the last three and a half years, nearly 15 million jobs have been created in the U.S. economy, according to the Bureau of Labor Statistics. However, it's important to keep in mind that an estimated 9 million workers lost their jobs during the COVID-19 pandemic. In essence, the net employment gain over the last few years is more to the tune of 5.5 million new jobs. I see these trends as a major catalyst for GoDaddy.
While the economy has been relatively strong for the past few years, the Federal Reserve is still doing what it can to bring down inflation and hopefully reduce interest rates. Although it's going to take some time for this to occur, the long-term theme that I see is that more new businesses will be created -- especially in the small and midsize enterprise (SME) demographic.
Considering SMEs are GoDaddy's target customers, I think the company is positioned well to benefit from an economy that is still in the middle of a rebound.
Image source: Getty Images.
Is GoDaddy a good stock to buy now?
As of the time of this writing, GoDaddy stock trades at a price-to-earnings (P/E) ratio of 12 -- about half of the P/E multiple for the S&P 500.
The disparity between GoDaddy's P/E and that of the broader market might suggest the stock is undervalued. And I'm not the only one who thinks that's the case. Per the first-quarter report, GoDaddy repurchased 2.8 million shares of stock under its $4 billion share repurchase program. One of the biggest reasons businesses repurchase stock is that management may view shares as undervalued.
Considering GoDaddy's attractive valuation, respectable growth, and profit margins, as well as its potential to benefit from an improving economic picture, I think the stock is a no-brainer right now.
Should you invest $1,000 in GoDaddy right now?
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool recommends GoDaddy. The Motley Fool has a disclosure policy.
