SimilarWeb and Wix: Contrasting Fortunes in the Tech Sector

Similarweb: The Market Underappreciates Ongoing Performance Improvements (NYSE:SMWB)

The company's potential to become non-cyclical in a recession could provide additional upside surprises, along with delivering digital data for big tech large language models. The stock for Similarweb Ltd. (NYSE:SMWB) is down from when I last wrote about the company, yet the company's business is looking even better now than it did at that time. Similarweb followed through on its plans to continue delivering free cash flow. The company guided to staying profitable on a non-GAAP basis and delivering positive free cash flow for the rest of the fiscal year. Similarweb achieved its 4th straight quarter of non-GAAP operating profit and even produced a company record non-GAAP operating margin of 9%. The chart below from the shareholder letter shows a healthy trend for gross margins. Operating margins are greatly improved from 2021 and 2022. Notably, Similarweb guided higher for profits...much higher. In Q1, the company guided to non-GAAP operating profit of $7.0M to $9.0M. That guidance surged to a range of $13M to $15M for the year, a 75% boost at the midpoint. Guidance for revenue increased just slightly. In Q1, the company guided to a revenue range of $242M to $246M, which would have been 12% growth year-over-year at the midpoint. That guidance increased to a range of $246M to $248M. Given all the concerns about IT-related spending, SMWB's guidance is quite good. Other highlights from forward-looking statements include: Around 75% of total Q2 RPO (Remaining Performance Obligations) will be recognized in the next 12 months. RPOs are the total value of contracted revenue not yet recognized, including deferred revenue and unbilled contracts. "Further improvement" in NRR (net revenue retention rate) based on Q2's change in trajectory Additional hiring in customer success and sales to "further accelerate growth" (a great confirmation of expectations) Increasing AOV (average order volume) from smaller customers An increase in demand from big tech companies who want to use digital data in their LLMs (large language models) and an accompanying acceleration in this product offering AI: From SimilarAsk to Data for LLMs? I have eagerly awaited more details on Similarweb's SimilarAsk feature. After all, AI functionality has been a dominant investing narrative this year. It seems I have to keep waiting - assuming the product remains in the portfolio - because Q2 earnings included no mention of SimilarAsk. The company launched a beta version exactly one year ago, so by this point I expect substantial commentary on SimilarAsk's progress. Instead of an update on SimilarAsk, the company talked up its potential to supply data to LLMs. Customers can "understand how the path to purchase is changing, where consumers are doing their research before making purchase decision and how the new AI chatbots are impacting this behavior." The commentary on these efforts suggested that Similarweb is still working on productizing and pricing this offering. Thus, for now, I do not know how to incorporate AI into Similarweb's valuation or future potential. Hopefully, it will produce a substantial upside surprise in the not-too-distant future. Valuation and Rating A software company selling for under 5 times sales is either a bargain or a value trap. I think SMWB is the former. With a 2.67 price/sales ratio (TTM - trailing 12 months) and a 2.63 EV/sales ratio (TTM), SMWB looks like a bargain even though the Quant ratings grade SWMB's valuation at a B-. The Quant ratings ding SMWB for its extremely high price/book and P/E (Non-GAAP). However, SMWB has the lowest price/sales ratio, by far, among its information technology peers. Moreover, the Quant ratings give SMWB a strong buy based on big jumps from last quarter in growth and revisions. I am not ready to upgrade SWMB to strong buy given the lingering uncertainty on how the company will develop its AI offering. For now, holding the buy rating reflects sufficiently well on the company's promising prospects. Is Similarweb Counter-Cyclical? An intriguing component of my strong impression of Similarweb is the possibility that the company could actually become non-cyclical. For the Q2 earnings report, Similarweb did not once refer to macroeconomic headwinds like some of many IT companies have done to-date. Instead, the company suggested that a recession could further boost the business. According to CEO Or Offer, "when markets are struggling, and you have a tough dynamic, maybe recession, maybe not, a lot of companies tend to double down on get market data to understand their positioning." Offer continued by claiming that Similarweb's digital marketing platform provides the answer these companies need: "we have a benefit here as our solution help get a company's visibility about market dynamics and where they're positioned in this hostile environment. So I think that those stuff are kind of giving nice tailwind to businesses like us." If these claims play out, Similarweb should provide additional upside surprises in coming quarters as the economy presumably gets tougher and the marketing environment become more intense. Better data and better use of data should become a source of competitive edge. The first recession of the AI-era could feature a scramble for more data-driven productivity. However, some short-sighted and/or budget-strapped companies will look at sales and marketing as one of the first places to cut. As a result, I am willing to wait and see confirmation of these counter-cyclical dynamics. If they pan out as the company hopes, then a major downside risk for Similarweb comes off the table and thus makes SMWB an even more attractive investment. Demand and Revenue Achievements Even if Similarweb turns out not to be as counter-cyclical as hoped, the company is going into the coming months and quarters with some impressive demand and revenue achievements. Upsold an existing customer into Similarweb's first eight-figure ARR tier. This same customer started with Similarweb many years ago at just "a few tens of thousands of dollars of ARR." This growth demonstrates the potential long-term growth path ahead for Similarweb with increased adoption. This growth trajectory shows in multi-year commitments. Forty-four percent of ARR came from customers with multi-year subscription commitments, up from 42% a year ago. Increased customer count to over 5,000, a surge driven by attracting more lower-end customers Overall net revenue retention rate of 99% and an NRR of 109% for the $100,000+ ARR segment, up sequentially. Customers who generate over $100K in ARR increased 8% year-over-year from 356 to 383 with ARR growing almost 25% year-over-year and becoming 60% of total ARR. The company also explained that "one of the key metrics we keep a close eye on is customer utilization of the platform, as this metric is often the most relevant leading indicator of the potential for retention and expansion or alternatively the risk of churn." However, the company provided no data on this metric. I will be looking for it in the next earnings release as a quantified confirmation of improving traction for the business. Conclusion and the Price Action The stock chart below shows that SMWB has yet to achieve lift-off despite sequentially improving financial performance. Sure, SMWB is up 46% year-to-date, but the stock also started the year near its all-time lows. SMWB is also about 18% off its highs for 2024. Finally, the stock is down about 2/3 from the all-time high set soon after the debut in the U.S. public market. Thus, I think the presumed, abiding wariness about SMWB will continue to offer buyable dips. That is, it is not a stock to chase higher. Fortunately, the chart below shows buyers have taken SMWB above its 200-day moving average (DMA) (the blue line below), an important long-term trend line which will hopefully hold firm as support this time around given the company's improving performance. Be careful out there! Dr. Duru has blogged about financial markets since the year 2000. A veteran of the dot-com bubble and bust, the financial crisis, and the coronavirus pandemic, he fully appreciates the value in trading and investing around the extremes of market behavior. In this spirit, his blog "One-Twenty Two" (https://drduru.com/onetwentytwo/) delivers a different narrative for students and fans of financial markets. Dr. Duru challenges conventional market wisdoms and offers unique perspectives. The blog posts cover stocks, options, currencies, Bitcoin, and more, while leveraging the tools of both technical and fundamental analysis for short-term and long-term trading and investing. Some of these ideas and analyses are also featured here on Seeking Alpha.Dr. Duru received a B.S. in Mechanical Engineering (and an honors degree in Values, Technology, Science and Society - now simply STS) from Stanford University. For graduate studies, Dr. Duru went on to earn a Ph.D. in Engineering-Economic Systems (now Management, Science, and Society). Dr. Duru's work experiences include:*Independent consulting in operations research and decision analysis*Management consulting in product development and technology strategy*Price optimization software for computer manufacturers and internet advertising (including a shared patent for methodology)*Business Intelligence and Data Analytics, including some Data Science and Data EngineeringConsulting practice: https://ahan-analytics.drduru.com/ Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in SMWB over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I took profits in my prior SMWB holding. After evaluating earnings results more closely, I intend to re-establish a position as a longer-term hold. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Wix: Firing On All Cylinders, Remains Long Term Growth Opportunity (NASDAQ:WIX)

Management raised its FY24 revenue guidance and while it may face headwinds from its Self Creator business should there be an economic slowdown, I believe the stock is attractively priced. Introduction & investment thesis I last wrote about Wix (NASDAQ:WIX) in May, where I let my "buy" rating on the stock based on my belief that the company will continue to drive high intent users, both Self Creators and Partners as it builds innovative AI-led products to boost productivity and overall experience, leading to a higher monetization rate and boosting overall ARPS (Average Revenue per Subscriber). Although the stock has declined 2.4% since the time of my writing, underperforming the index, it is up more than 27% since my initial "buy" rating, significantly outperforming the index. Wix is a cloud-based web development platform that recently reported its Q2 FY24 earnings, where revenue and earnings grew 12% and 32% YoY, beating estimates. During the quarter, the momentum in its Partners business continued, growing 29% YoY with the growing adoption of Wix Studio and Business Solutions, while it continued to drive robust AI-led product innovation. Although the business may face some headwinds from its Self Creator segment, especially if macroeconomic conditions worsen, I believe that it is making a smart move to divest part of the risk by gaining market share in its Partners business. Therefore, after assessing both the "good" and the "bad," I believe that Wix continues to remain a "buy" with a similar price target of $200, which represents an upside of 24% from its current levels. The good: strong growth in partners business from the growing adoption of Wix Studio, expanding commerce business & strong profitability Wix reported its Q2 FY24 earnings, where revenue grew 12% YoY to $435.7M, beating estimates. Out of the $435.7M in revenue, Creative Solutions revenue grew 9% YoY, contributing close to 72% of Total Revenue, while the remaining 28% of the revenue was driven by Business Solutions, which grew 20% YoY. Plus, bookings growth also accelerated from 10% growth in Q1 to 15% in Q2, driven by absorption of the price increases implemented earlier this year as well as growth from its strategic initiatives that include gaining market share in its Partners business and building AI-led product innovation to drive higher user conversion and monetization. During the quarter, the company continued to expand their user base with Partners and Self Creators, adding 4.7M new users in Q2 that demonstrate strong conversion, ending the quarter with 273M registered users, while their Q1 FY24 cohort remains their strongest non-Covid cohort, generating over $43.4M in cumulative bookings in the first two quarters ending in Q2 FY24. Meanwhile, new and existing users continued to purchase higher-priced packages and attach more business applications, leading to higher ARPS. In terms of their strategic initiatives, its Partners business grew 29% YoY, making up 34% of Total Revenue as Wix onboarded new agencies, while existing Partners continued to deepen their adoption of Wix Studio and Business Solutions, with Studio package bookings growing 20% on a sequential basis. As the company adds new features such as dynamic no-code design expressions, business-enablement capabilities, and most importantly, their highly requested Figma plugin, I believe that it should continue to attract new Partners to join the Wix platform through Studio while the existing cohorts ramp their adoption as they build more projects on Studio, leading to higher ARPS. Moving on to their second strategic priority, which is AI, the company released 17 AI business assistants across a wide range of use cases to support their users and streamline their experience, where users can describe their goals through an AI-chat experience and AI will act as the "right-hand" person executing the action on behalf of the user. Additionally, it has also launched AI creation capabilities for their mobile app builder, where the technology can create a branded app based on the user's goals and aesthetic parameters, as well as an AI Blog Generator that can turn relevant topics into "near-ready" articles, streamlining the whole workflow process and improving the productivity of their users. Furthermore, Wix also saw an expansion in their commerce platform, with transaction revenue growing 21% YoY at a record take rate of 1.68%, as they have been successfully able to grow their GPV as a result of larger merchants joining Wix, particularly partners who contributed nearly 50% of this quarter's GPV as they continued to deepen their adoption of commerce enablement tools across supported verticals. Meanwhile, the company has been adding new payment partners and driving higher adoption of Wix Payments so that they can increase the ownership and monetization of the GPV that flows through Wix. Shifting gears to profitability, Wix generated $90.19M in non-GAAP operating income, which grew 32% YoY with a margin expansion of 300 basis points on a year-over-year basis of 21%. This was driven by a combination of higher operating leverage from higher ARPS, while the company also streamlined its operating expenses, particularly with increasing payroll efficiencies from lower average headcount and lower advertising expenses. The bad: macroeconomic slowdown and competitive pressures remain Although I had previously discussed my concern regarding possible user churn from the new pricing model, it looks like bookings continue to remain strong with strong retention rates, especially among its Partners. However, I would like to point out that the management hasn't explicitly shared their Net Retention Rate figure. In the meantime, macroeconomic pressures persist, with the small business optimism index continuing to remain at historically low levels. Even though Wix has made a strategic move to divest some of the risk in its Creator or small business segment to gain market share with larger customers, i.e., Partners, I believe that it will see an overall slowdown if the economy materially slows down from its current levels. Simultaneously, it also faces competition from Shopify (NYSE:SHOP), which has taken a similar approach to gain market share in the enterprise customer segment, thus growing its GMV and Subscription revenue while unlocking operating leverage. In its latest quarterly earnings, Shopify saw a 22% increase in GMV, exceeding expectations. At the same time, Shopify is also projected to grow 1.8 times the growth rate of Wix, with a higher price multiple on a comparative basis. However, I would like to point out that Wix is the more profitable out of the two. Revisiting my valuation: maintaining my price target with an upside of 24% Looking forward, the management further raised the lower bound of its revenue guidance from the previous range of $1.738-1.761B to $1.747-1.761B, which would represent a growth rate of 12-13% on a year-over-year basis. Assuming that the company can grow in the same 12% range over the next five years as it continues to execute on its Partners and AI strategy to attract high-intent users and monetize effectively, while expanding its Commerce business, it should generate a total of $2.76B in revenue by FY28. From a profitability standpoint, the management has kept its guidance for non-GAAP gross margin at 68-69% while tightening its expectation for non-GAAP operating expenses at 50% of Total Revenue. This would translate to a non-GAAP operating income of $324M, at an approximate margin of 18.5%. Assuming that non-GAAP gross margins improve from their current level to 72% while it streamlines its operating expenses at 45% of Total Revenue per its long-term financial model, it should generate close to $745M in non-GAAP operating income, which would be equivalent to a present value of $509M, when discounted at 10%. Taking the S&P 500 as a proxy, where its companies grow their earnings on average by 8% over a 10-year period, with a price-to-earnings ratio of 15-18, I believe Wix should be trading at 1.5 times the multiple, given the growth rate of its earnings during this period of time. This will translate to a PE ratio of 22.5, or a price target of $201, which represents an upside of 24% from its current levels. My final verdict and conclusions I believe that Wix remains attractively priced at its current levels with sufficient upside. Although the company may be prone to seeing its business slow down, especially in its Self Creator segment, I believe that it is de-risking by onboarding larger Partner clients. Meanwhile, I am impressed by the continued momentum in the company's Partner business, which is growing at a robust pace as it expands adoption of Wix Studio and business solutions, leading to higher ARPS. Simultaneously, the company is driving robust product innovation as it integrates AI into its solutions to drive high intent users, who tend to convert into monetized users at a higher rate, while keeping its operating expenses under check. Finally, the acceleration in its transaction revenue is also a bright spot and should continue to grow as it onboards larger merchants across verticals on the platform while expanding Wix payments to better monetize its GPV that flows through the platform. Therefore, after assessing both the "good" and the "bad," I believe that Wix continues to remain a "buy" with a price target of at least $200, which represents an upside of 24% from its current levels. Amrita runs a boutique family office fund in beautiful Vancouver, where she leads the investment strategy for the family fund. The fund's objective is to invest capital in sustainable, growth-driven companies that maximize shareholder equity by meeting their growth-oriented goals. In addition, she also started her own award-winning newsletter, The Pragmatic Optimist which focuses on portfolio strategy, valuation, and macroeconomics in concert with her husband Uttam Dey who is also a contributor on Seeking Alpha. Prior to cofounding her fund, Amrita worked for 5 years in high-growth supply-chain start-ups in downtown San Francisco, where she led strategy. During her time in the Bay Area, she also worked with venture capital firms and start-ups, where her efforts led her to grow the user acquisition business. During this time, she was introduced to investment portfolios and was able to maximize returns for clients during the pandemic. The cornerstone of Amritas work rests on democratizing financial literacy for everyone and breaking down financial jargon and complex macroeconomic concepts into formats that are easily digestible but more empowering than the typical investment thesis. Her newsletter has been featured as the Top Newsletter in Finance on popular newsletter platforms and she aims to bring her ideas to Seeking Alpha as well. Analyst's Disclosure: I/we have a beneficial long position in the shares of WIX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.