The e-commerce space is packed with competition. While behemoths such as Amazon and Walmart dominate online shopping, smaller players such as Shopify and Etsy have proven to be formidable players in the e-commerce realm.
Since its initial public offering (IPO) in 2015, shares of Shopify have returned a jaw-dropping 2,400%. However, over the last few years, the company has polarized some of its investor base. After a botched acquisition with Flexport and an inconsistent financial performance, growth stock investors might be best off looking elsewhere.
One alternative to Shopify that I like is GoDaddy(NYSE: GDDY), which was recently added to the S&P 500.
Let's dive into GoDaddy's business and explore why I think this stock is undervalued and looks like a great buy right now.
GoDaddy is an impressive business all around
The charts below illustrate a number of financial metrics for GoDaddy and Shopify.
GDDY Revenue (Quarterly) data by YCharts.
While Shopify is the larger company in terms of revenue, there are a couple of subtle themes that investors should take away.
First, Shopify's revenue trends have experienced more dramatic ebbs and flows compared to GoDaddy. Some of this is due to the divestiture of Flexport and how it affects Shopify's reported financials. However, that deal was completed in May 2023. And yet, in the year Shopify has been operating as a stand-alone entity again, the revenue profile above still indicates some inconsistencies.
What I find more telling about Shopify's business versus GoDaddy's are the companies' respective free cash flow profiles. Similar to its revenue base, Shopify's free cash flow has been pretty unpredictable. While GoDaddy's free cash flow experienced a notable dip in mid-2023, the charts above underline the company's rising cash flow situation for several quarters now.
Although this is impressive, there is a lot more to unpack regarding the future of GoDaddy.
Image source: Getty Images.
The economic turnaround could be a bellwether for the business
As I expressed previously, one area where GoDaddy has struggled is increasing its user base. The company's customer count has remained flat for some time now -- meaning most of the revenue growth can be attributed to increasing average revenue per user (ARPU) due to a high degree of cross-selling.
US Inflation Rate data by YCharts
The chart above illustrates the U.S. inflation rate over the last 10 years. Although inflation has come down dramatically since peak levels in 2022, the current rate of nearly 3% is still above the Federal Reserve's long-term target of 2%.
Among those hit hardest by this lengthy battle with inflation are small and mid-size businesses. Coincidentally, small businesses are GoDaddy's target demographic customer.
To me, there is a direct correlation between the challenging macroeconomic environment of the last couple of years and GoDaddy's plateauing user base. In other words, while business applications are on the rise, it's important to keep in mind that this growth is net of what was lost during the pandemic.
I think that as the economic picture continues to strengthen, GoDaddy will ultimately see an influx of new users as more businesses are formed.
GoDaddy stock is dirt cheap
The valuation disparity between Shopify and GoDaddy isn't even close. Right now, Shopify's forward price-to-earnings (P/E) multiple is more than 2.5x that of GoDaddy.
GDDY PE Ratio (Forward) data by YCharts.
This could mean that investors think Shopify's growth prospects are more robust than GoDaddy's. However, having explored several financial metrics above, I'm hard-pressed to understand why some may take that stance.
Shopify has demonstrated a questionable strategic vision, underpinned by an inconsistent financial performance. To me, Shopify is more of a trade than an investment right now.
In contrast, GoDaddy appears to be chugging along in an otherwise cloudy macro environment. As inflation continues to cool down, I suspect the economy will experience more new business and job growth, which should spark some new interest in GoDaddy's products.
I see GoDaddy as an underappreciated gem in the markets right now, and I think the stock offers a compelling value opportunity for long-term investors.
Should you invest $1,000 in GoDaddy right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon and Shopify. The Motley Fool has positions in and recommends Amazon, Etsy, Shopify, and Walmart. The Motley Fool recommends GoDaddy. The Motley Fool has a disclosure policy.
