Down 17% since its Recent IPO, Is Squarespace (SQSP) Worth Investing In?

Creating a website used to be a complicated process. Today, there are platforms that allow even the most novice internet users to create stunning websites for their brand, product or service. Squarespace, Inc. (SQSP), which recently went public, is one such platform.

SQSP provides software as a service (SaaS) for website building and hosting, and allows users to use pre-built website templates along with drag-and-drop elements to create personalized web pages.

In addition to allowing its users to create and host websites, the company also provides tools for e-commerce, managing a social media presence, marketing, and scheduling capabilities. Through its commerce solutions, it provides its customers everything they need to sell physical products, subscriptions, content, or services online. Its marketing solutions include email campaigns, customer relationship management functionalities, search engine optimization (SEO), and analytics tools to help its customers understand and target their audiences while driving traffic, sales and conversion.

SQSP’s stock performance since its direct listing on the NYSE in May 2021 has disappointed investors, as the stock slipped 17.8%, underperforming the S&P 500 which has advanced 8.4% over the last 6 months.  

However, SQSP is exposed to several key digital trends that should boost its activity in the next period. In this article, I will analyze the company’s fundamentals to see if the company makes for a worthwhile investment. 

SQSP has been growing its business consistently in the past years, but its financials have suffered from its direct listing and the acquisition of Tock.

Fundamentals for the website specialist appear fragile. In terms of the top-line, SQSP is expected to grow at a fast pace, as analysts expect net sales to increase by 25.4% to $779m in 2021 and by another 20% to $935m in 2022. On the other hand, SQSP is anticipated to deliver a net loss of $231m in 2021, compared to revenues of $306m the preceding year. 

This is mainly attributable to operating expense increasing, which is expected to surge 70.3% year-on-year to $821.9m in 2021, following its direct listing costs. Nevertheless, the company’s profitability should turn positive in 2022, with an expected net profit of $313m, which provides a small net margin of 3.34%.

With net debt of $309m in 2021, corresponding to a leverage ratio of 2.95x, the company is close to reaching a relatively high indebtedness. Its recent acquisition of Tock, a restaurant-focused reservation, hospitality, and order management platform, has weighed heavily on its balance sheet. 

Investors have been suspicious about this acquisition, both because of the new market SQSP is venturing into and the expensive acquisition cost, which casts doubt on SQSP’s strategic development. However, purchasing Tock will also create opportunities, such as expanding its hospitality offerings to accelerate sales, providing greater marketing integrations, and connecting directly with its customers.

The company is well-positioned to benefit from the growth of e-commerce and SQSP’s valuation metrics are undervalued compared to its peers

SQSP is exposed to several key industry trends that are set to boost the company’s fundamentals. Among these trends, the increasing adoption of online presence solutions, growth of e-commerce, and an increasing desire among small- to mid-sized businesses for direct-to-consumer relationships. These adaptations to market trends should provide sufficient catalysts for the stock to rally back to its listing price and beyond. 

The opinions of Wall Street analysts are mostly bullish on SQSP. With 10/14 analysts recommending a “buy” and an average 12-month target price of $61.85 per share, there is a potential upside of 68.3% for the stock. Yet, market participants remained unresponsive to the company’s recent announcements about its new cross-platform upgrades and product releases.

This should constitute an opportunity for investors looking to initiate a position. SQSP is currently trading at a P/E ratio of 51.52x and a P/S of 7.38x, whereas Wix.com (WIX), one of its closest competitors, is valued at a P/S of 8.78x. 

Conclusion

Despite shares falling sharply after its listing, I believe there is opportunity for investors to buy SQSP at discounted price. The deterioration of the company’s fundamentals has been largely due to the high acquisition cost of Tock and direct listing costs. However, I believe this to be transitory.  The company has grown its top line at a fast clip in recent years and should continue to do so, given the healthy industry it operates in.