GoDaddy: Where Float Does Not Generate Income

Having a lot of float does not necessarily give a company income nor make it a value investment. Case in point, GoDaddy (NYSE: GDDY)—the world’s largest provider of domain names should be generating a lot of income from the web services it provides but does not.

GoDaddy claims to have more than 13 million customers worldwide, which should be generating a lot of income. The blog for Primo Grafix Web Design estimated that the average GoDaddy customer pays around $10.98 a month for web hosting. That means GoDaddy should be generating a lot of float each month—between $100 and $142.74 million, right?

That would make it a classic value investment because GoDaddy could tap it into that stream of income for expansion, acquisition, stock buyback, financing or dividends. Yet it does not seem to be the case when one takes a look at GoDaddy’s financial numbers.

Float and Negative Net Income

A quick glance at YCharts shows us that GoDaddy reported a net income of -$135.4 million on March 31, 2015. Okay, that’s better than March 31, 2014, when GoDaddy reported a net income of -$199.42 million. GoDaddy’s income grew by $64.02 million in a year, but it’s $135.4 million in the red. At the rate its income is growing, it will take GoDaddy around three years to actually generate some positive numbers.

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Some of GoDaddy’s other numbers are pretty awful too; it reported a profit margin of -11.53% and a return on equity of -29.87% on March 31, 2015. The company also had a price to book value of $10.86 a share.

Now for the truly interesting part; GoDaddy should not be doing that badly. The company reported that its TTM revenues were growing at a rate of 17.52%, on March 31, 2015. Between March 31, 2014, and March 31, 2015, the hosting company’s revenue grew by $255 million, rising from $1.188 billion in 2014 to $1.443 billion in 2015.

A Growing Cash Flow

GoDaddy’s revenue is growing fast, which will make some of us wonder if it is a potential value investment. There is some merit to that argument because GoDaddy reported a free cash flow of $63.9 million on March 31, 2015, its highest number ever in that category. That was an increase of $29.8 million over March 2014, when it reported a free cash flow of $34.1 million. The hosting service’s cash flow nearly doubled in a year.
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If that was not enough, GoDaddy’s market capitalization on July 17, 2015, was below its enterprise value, indicating that it is clearly undervalued. At the close of business on July 17, 2015, GoDaddy reported a market cap of $4.084 billion and an enterprise value of $5.304 billion.

A Company to Watch

My take on the matter is that GoDaddy is a company to watch. It has demonstrated that it can grow its revenues and grow its cash flow even if it is not yet generating income. At some point, GoDaddy might cross the line from edgy technology offering to actual value investment.

If you want to take a risk on a fairly low-cost technology play, GoDaddy is not a bad risk. The company has proven that it can make money and generate float even though it has not yet figured out how to make a profit.
GoDaddy has some other value characteristics as well. It operates in a less than glamorous area of the web, providing low-cost hosting services to small business people and bloggers. It also advertises heavily in somewhat questionable ways; shades of Warren Buffett favorite GEICO and its base model looks designed to generate quite a bit of float.

Time might prove that GoDaddy could be that very elusive animal, a true value investment in technology. Value investors should definitely keep an eye on this stock and pay very close attention when its earnings report for June.