Marketing Push For Airo Will Reduce Margins Despite AI Cost Savings

Key Takeaways

• Expansion of Pricing & Bundling across segments and AI enhancements aims to drive growth, retention, and higher ARPU.
  
• Increased marketing spend for product launches may impact margins, while generative AI solutions could improve efficiency and reduce costs.
  
• GoDaddy's AI-driven growth strategies and operational efficiencies are boosting customer engagement and profitability, supporting long-term earnings and shareholder value.

Catalysts

Engages in the design and development of cloud-based products in the United States and internationally.

• GoDaddy plans to expand its Pricing & Bundling initiative across more product segments, potentially driving revenue growth in both Applications & Commerce (A&C) and core platform segments starting in Q4, affecting future revenue positively.
  
• The company aims to enhance customer experience with new AI-powered features and products like GoDaddy Airo, which has shown promising engagement and discovery. This could lead to improvements in customer retention and potentially higher average revenue per user (ARPU).
  
• GoDaddy is increasing its investment in marketing initiatives to support the broader launch of Airo, aiming to accelerate customer acquisition and growth. This increased spending could temporarily impact net margins as marketing expenses rise before realizing the potential revenue benefits.
  
• The implementation of generative AI-powered customer care solutions is expected to improve efficiency and reduce care costs, potentially enhancing net margins as operational expenses decrease.
  
• While the company reports strong free cash flow and EBITDA margin growth, concerns may arise around the sustainability of this growth pace, especially with the planned scale of marketing investments and enhanced features, potentially affecting earnings projections if the expected return on these expenditures is not realized promptly.

GoDaddy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GoDaddy's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.3% today to 18.4% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $8.19) by about December 2027, down from $1.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $955 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.7x on those 2027 earnings, up from 15.7x today. This future PE is lower than the current PE for the US IT industry at 43.8x.
• Analysts expect the number of shares outstanding to decline by 2.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

GoDaddy Future Earnings Per Share Growth

Risks

• GoDaddy's Pricing & Bundling initiatives, using software platforms and machine learning, have shown significant success in driving growth and could provide favorable financial outcomes across more product suites, positively affecting both revenue and net margins.
  
• Strong customer engagement with GoDaddy's AI-powered solutions, such as Airo, has already resulted in substantial contributions to website subscriptions, which can enhance future revenue generation and potentially improve earnings if this engagement continues to expand.
  
• The company's successful operational efficiencies and cost optimization strategies, resulting in a 60 million minute reduction in contact times without sacrificing satisfaction, indicate potential for improved net margins and profitability.
  
• GoDaddy's continuous innovation and enhanced customer experiences, especially through advanced AI features and new product launches, provide a competitive edge likely to drive higher customer retention and conversion rates, increasing revenue and long-term earnings.
  
• The company's disciplined capital allocation, focus on share buybacks, and consistent revenue growth targets of 6% to 8% annually signal strong financial health, supporting stable or increased earnings and shareholder value creation over time.

Valuation

• The analysts have a consensus price target of $195.63 for GoDaddy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $250.0, and the most bearish reporting a price target of just $135.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.8 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 29.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of $207.46, the analyst's price target of $195.63 is 6.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.