Similarweb Stock: On-demand bullish for web traffic analysis (NYSE: SMWB)

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Thesis

I’m bullish on Similarweb (New York stock market :SMWB) as I believe the company will experience sustained multi-year tailwinds due to demand for web traffic and data analytics. Shares of the company are down more than 50% since the start of the year and long-term investors may appreciate the weakness in the stock price as a buying opportunity. In the near term, SMWB stock could certainly experience further price depreciation as bearish market sentiment does not appear to have bottomed yet. This, however, should have nothing to do with company fundamentals, including an attractive value proposition and strong market opportunity. Based on an assessment of EV/EBITDA multiples, I calculate a base target price of $21.24/share, which indicates an upside of almost 200%. I start with a buy recommendation.

About Similarweb

Similarweb is an Israeli data analytics and web traffic intelligence company founded in 2007. Similarweb works a platform that allows businesses to discover and analyze website traffic information, such as keywords, traffic volume, engagement metrics, and more. While alternative platforms such as Salesforce and Google Analytics mainly provide information about the company’s own data, Similarweb also gives information about competitors, partners and prospects. This provides businesses with the ability to support multiple high-value use cases such as digital search and digital marketing.

Presentation of Similarweb's activity

Similarweb Investor Presentation

The Similarweb Opportunity

Similarweb’s value proposition is about to benefit of a multi-year tailwind from demand for data intelligence and website traffic analysis. At this point, it is widely recognized that digital presence and strength is a key driver of business success. At the same time, the value of digital data insights in fueling digital power is undisputed. That said, since Amazon Alexa Web closed in May 2022, Similarweb is well positioned to become the leading address for businesses to discover and analyze web traffic insights.

According to the company’s management team, Similarweb’s total addressable market is currently estimated at $34 billion. The company derives this metric by multiplying the number of qualified customers (companies that meet certain qualifications) by Similarweb’s own market size-weighted contract value information. As of March 2022, Similarweb serves over 3,700 customers, including notable brands such as Google, Adobe, Roche, Walmart, Adidas, DHL and more.

Similarweb Value Proposition

Similarweb Investor Presentation

The company’s biggest competitor is Semrush (SEMR). Personally, I’ve used both Semrush and Similarweb and feel the companies’ value propositions are quite similar. I argue that Similarweb might have an edge from a usability perspective, while Semrush’s data insights are slightly ahead. But the overall similarity of the value proposition is something investors should note and watch out for. If the two companies were to merge, which is plausible, I would go ultra-bullish on the combined entity.

Financial performance

Commercial monetization of Similarweb is accelerating as the company saw a year-over-year revenue increase of more than 45%, from $93 million in 2020 to $137.6 million in 2021. Additionally, results in the first quarter of 2022 saw an even stronger quarter-over-quarter increase of 51% ($177 million annualized). Most notably, 99% of revenue is classified as recurring revenue, of which approximately 35% is based on multiple subscriptions. However, operating profit is still negative as the company invests in customer acquisition and business development. In 2021, Similarweb generated a gross profit of $105.9 million (margin >70%) and an operating loss of $66.1 million, with the company spending $127.6 million on marketing/sales and $44.4 million in R&D.

Review of Similarweb is strong. At the end of 2021, the company had recorded $128.9 million in cash and short-term investments and no debt. Operating cash was negative at $27.6 million. That said, Similarweb could pretty much maintain the same burn rate for five more years, before new funding is needed. But even then, given the company’s debt-free position, Similarweb should easily be able to raise funds through debt, without diluting shareholders.

How analysts see it

In general, analysts are very bullish on Similarweb, with a consensus average target price of $20.57/share. Specifically, this target price would indicate an upside of around 200%. According to the Bloomberg Terminal, as of June 2022, analysts see Similarweb’s revenue in 2022, 2023, and 2024 at $196.37 million, $266.38 million, and $351.67 million, respectively. This would equate to a 3-year CAGR of over 20%. EPS are estimated at -$1.15, -$0.97 and -$0.61 respectively for the same period.

Similarweb price target

Looking for Alpha

Evaluation

To value the Similarweb action, I suggest using multiples, because the company is not yet profitable and visibility on profitability remains limited. However, please note that I am not a fan of multiple valuations. Thus, this section should only be considered as a point of reference for anchoring a valuation estimate. That said, I suggest applying the 1-year average EV/EBITDA multiple of the two industry leaders, Similarweb (x3.4) and Semrush (x5.9), equal to x4.65. If we apply this multiple to Similarweb’s 2024 revenue of $351.67 million, we calculate an EV of $1.64 billion and a net worth of $1.76 billion, or $21.24/share.

Risks

I would like to highlight the following downside risks that could cause Similarweb’s stock to differ materially from my price target:

First, Similarweb writes losses. There can be no assurance that the business will achieve significant profitability in the next few years, if ever.

Second, a deterioration in the macro environment, including inflation and supply chain challenges, could negatively impact Similarweb’s customer base. If the challenges turn out to be more severe and/or last longer than expected, the company’s financial outlook should be adjusted accordingly.

Third, investors should watch out for competitive forces in the industry, as I pointed out the similarity with Semrush. If competition increases more than what is modeled by analysts, profitability margins and EPS estimates for Similarweb should be adjusted accordingly.

Fourth, much of Similarweb’s stock price volatility is currently driven by investor sentiment toward risk and growth assets. Thus, investors should expect price volatility even if Similarweb’s business outlook remains unchanged.

Finally, inflation and rising real yields could add significant headwinds to Similarweb’s stock price as higher discount rates affect the net present value of long-term cash flows.

Conclusion

Balancing the risk/reward for Similarweb, the company deserves a buy recommendation. I think Similarweb is poised to benefit from a growing demand for high-quality web traffic analytics. Additionally, the stock appears to be priced at a lower cost, as my valuation framework based on EV/EBITDA multiples indicates an upside of almost 200%. I assign a buy recommendation with a base target price of $21.24/share.

Charles J. Kaplan