GoDaddy (GDDY): Buy, Sell, or Hold Post Q3 Earnings?

GoDaddy has been on fire lately. In the past six months alone, the company’s stock price has rocketed 49.6%, reaching $206.62 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in GoDaddy, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free .

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why you should be careful with GDDY and a stock we'd rather own.

Why Is GoDaddy Not Exciting?

Founded by Bob Parsons after selling his first company to Intuit, GoDaddy (NYSE:GDDY) provides small and mid-sized businesses with the ability to buy a web domain and tools to create and manage a website.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, GoDaddy’s sales grew at a weak 6.9% compounded annual growth rate over the last three years. This was below our standard for the software sector.

2. Weak ARR Points to Soft Demand

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

GoDaddy’s ARR came in at $3.97 billion in Q3, and over the last four quarters, its year-on-year growth averaged 6.1%. This performance was underwhelming and suggests that increasing competition is causing challenges in securing longer-term commitments.

3. Customer Churn Hurts Long-Term Outlook

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

GoDaddy’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 86.5% in Q3. This means GoDaddy’s revenue would’ve decreased by 13.5% over the last 12 months if it didn’t win any new customers.

GoDaddy has a poor net retention rate, warning us that its customers are churning and that its products might not live up to expectations.

Final Judgment

GoDaddy isn’t a terrible business, but it isn’t one of our picks. After the recent surge, the stock trades at 6.3× forward price-to-sales (or $206.62 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at KLA Corporation, a picks and shovels play for semiconductor manufacturing .