A Deep Dive into the Namesilo Business…The core NameSilo business is easily more valuable than the entire market cap of the business at the current price…
This is such a tough one for me, I am a big believer in Paul and is ability to search out value in the small cap space and Kristaps has a strong tech background and operating history with the NameSilo domain growth since the acquisition speaking for itself but, I really don’t like any of the major portfolio investments other the CTZ.V which I think very well could be a takeout in 2019 north of 0.70/share.
My Thesis, Core NameSilo business can take the stock much higher and the investments inclusive of IPA.V, AEP.V, VGL.V, LTE.V, etc. and 13 Bitcoins….unghhh are all upside call options.
Core NameSilo Let’s Dig In;
Domain Growth
The Domain growth has been nothing but astonishing, when I woke up in a foggy haze this morning to update my domain count for end of Year in my model I got a number of 2,483,147 active domains. Adding 200,000+ domains in December another record month after November was a record.
The ultimate land grab play in the domain space. Up 115% YoY, Up 24% QoQ and running 9% MoM the last two months. Three words for you, Accelerating Revenue Growth – the holy grail.
Looking to 2019 is where things get interesting, let’s assume a 87% retention rate which results in 2,160,338 base to build from. Given in Q4 alone they have added close to 500,000 domains I don’t think 1.0M – 1.5M… if not 2.0M Gross domain additions are out of the question. This results in 2019 end of year domain target of 3.25M – 3.75M domain w upside scenario to 4.0M domains. Base Case 3.5M active domains.
Average Revenue Per Domain – ARPD
The land grab discount strategy will never result in as high ARPD as the peer group, but on the cost side they will never have a big bloated SG&A budget and high domain acquisition costs.
If you look over the last couple fiscal years for the NameSilo business it has been pretty consistent; FY17 ARPD - $11.8, FY18 ARPD - $11.0 FY19 ARPD est. -$11.0. If you take a yearly weighted average of domain count it would be fairly consistent. You look at GoDaddy ARPD it runs at $40-45USD ARPD…Big difference, you can really see the dramatic upside scenario from selling ancillary services.
Given their current bare bones discount model results in an EBITDA margin of aprox. 8-10% relative to a peers group running hot in the 30% EBITDA range there is no where to go but up as the business scales and diversifies revenue sources.
Ancillary Service Offerings
The key driver of ARPD in 2019 and beyond and ultimately the overall share price. I am not as bulled up as some as upselling a customer base that ultimately came to the platform for the lowest cost options might be a little tough.
However, I think the growth in marketplace services revenue is great evidence that they will be able to be successful. If you look at marketplace services Revenue they have grown this business from essentially 0 in FY15 to up close to a $2M revenue business by FY17.
Marketplace, Email, Design, Hosting or Security chose your pick. Each of them don’t have to be a success but each one that hits just makes the story so much more attractive.
Consolidation in the Space
These domain businesses are being snapped up left and right. How Paul was able to snap up one of the fastest growing one on the cheap is beyond me, Well Done.
If you look at the publicly traded peer group trading at 3.0x – 4.0x EV/Sales NameSilo is trading at such a discount to the peer group with a much superior growth rate.
NameSilo has to start to be taken seriously, if you look at registrar owl they are quickly becoming a Top 15 domain provider. It is becoming a strategic asset in a highly competitive and consolidating space.
Just take a look at some of the names in the space that still lack scale, Alibaba, Google, Amazon & not to mention all the Private Equity circling the space. Now tell me how good NameSilo would look within the Amazon fleet of services with how quickly Amazon is growing its commerce business. Amazon’s whole model is the low cost model and cross sell services, this blends perfectly with the NameSilo model. Just thought I would mention it…
Valuation
Using 65M Share count and Net Debt of 5M (Net of Portfolio Investments) and a 3.5M Domain Count with a $10 ARPD with a 3.0x-4.0x EV/Sales multiple gets me to a target price of 1.50 – 2.00/share or 1.75/share at the midpoint.
I am not calling you see that price but you can see the relative discount it is trading at. Granted some of it is warranted given the significant delta in EBITDA margin profile relative to the peer group which is somewhat compensated by the growth rate.
Just Give me 2.0x EV/Sales and I get to a target price of 1.00/share which is a good place to start!!!
In Conclusion, this is right up there as the best risk reward setups for 2019 right up there with BEW.V in the tech space for 2019. The visibility into the business by being able to follow the domain count everyday lets you follow their progress.
It’s and ARPD and Domain growth story for 2019. If one of those metrics works the story is a double if they both increase… you are looking at a multiple bagger!!!
Disclosure: Started a position this week, waiting for another Q or 2 to see the numbers come in before backing up the truck.
LONG