My Case for 1.00/share in the next 12 – 18 Months…Thought I would front run the press release that we are going to get next week about them hitting 3M in domains because as the fundamentals and underlying domain count has been accelerating the last 4 weeks the stock has been weak why, who knows.
I should stipulate, I have never met either Paul or Kristaps but I have been real impressed what they are building. There are many people smarter than I that are dialed in on this name especially on a qualitative basis. I will stay in my lane and stick to the numbers.
Here we go;
Domain Growth
The north star to this story, the transparency provided with the up to the minute counter is all you have to look at. The acceleration of the underlying domain count has been on fire this month. In June alone as of midnight on the 25th they have added 118,745 bringing the count to 2,974,250 domains which is up 76.31% YoY 9.43% QoQ & 4.16% MoM.
With the second derivative of QoQ and MoM domain growth rates reaccelerating adding 4,750/day in the month of June.
My base assumption for 2019 now is for 3.5M domains for year end which would represent 1M+ domains added in 2019 alone which would represent 41% growth in domain count. Don’t see why that cant continue and be a base growth basis on an absolute basis going forward. 4.5M domains by Dec 2020.
Pricing
This is clearly their competitive advantage as they are the lowest cost provider across the entire domain space.
As a result, they continue to take share from high priced peers of GoDaddy & VeriSign through Network Solutions. The publicly available information tells you all you need to know.
GoDaddy – Regular $15.17, Renew/Transfer $15.17 & Privacy $9.99
Network Solutions - Regular $34.99, Renew/Transfer $34.99/$19.00 & Privacy $9.00
NameSilo - Regular $8.99, Renew/Transfer $8.99/$8.39 & Privacy $0.00
The industry giants refuse to bring down price and as a result they continue to bleed domains to NameSilo and there are no signs of it slowing.
Rebates
This is broaching outside my area of expertise here, but I will keep it simple because it is a critical part of the story. The nature of the accounting makes the reporting of these rebates lumpy and back end weighted in the fiscal year.
Since they are accounted as a reduction of cost of sales and they were not received until after Q1 the Gross margin and resulting EBITDA margin was understated. If you average gross margin in Q4 and Q1 to get a figure gross margin figure of 15.5% which is a good base to go from as they build out ancillary services.
This results in a lot of cash coming into the company as they receive rebates as the growth remains so strong.
Ancillaries Services
This is where you get the multiplier effect to the story and the massive operating leverage that is hidden within NameSilo.
They have rolled out hosting and email with others to follow. This is where the high margin revenue comes from and the full suite that a web builder would offer would be massive.
The GoDaddy model is where I see NameSilo going. Lets look at GoDaddy Q1 FY19 revenue breakdown;
Domains - $ 319,000,000 (45% of Revenue)
Hosting & Presence - $ 268,900,000 (38% of Revenue)
Business Applications - $ 121,500,000 (17% of Revenue)
Total Revenue - $ 710,000,000
Namesilo has just launched Hosting and Business Applications are still to come. They still have the capacity within its pre existing domain base to grow revenue by over 100% per domain without adding another domain.
On a 3,500,000 domain base NameSilo has the revenue potential of close to 75 – 80M using a similar revenue breakdown to GoDaddy, that is all I got to say on that. NameSilo current market cap 25M
Balance Sheet
Will hit this one real quick, I was waiting for this to be addressed before backing up the truck. Main thing no dilution and plenty of cashflow to pay it off over time as debt got termed out again.
Big thing here, I am a big believer in these tangible asset light business with minimal CapEx. They are some of the most efficient capital allocators and capital compounders you can find. Just buy it and hold it.
On the Numbers
As I roll forward my model to 2020 I can see them adding another 1M domains so you can make a case you could end 2020 with a 4.5M domain count.
Using a $2.50/Revenue per Quarter per Domain gets me to a revenue number of $41.5M from domains.
Pick your take rate on hosting & other ancillary services and this is where things get interesting, If I assume only a 1% of domains purchase hosting at $2.99 USD/Month this add $2M in high margin revenue to NameSilo.
I think this is conservative especially if you look at larger peers and revenue mix breakdown but it would add entire multiple turn to the valuation and result in a significant expansion in gross/EBITDA margin and resulting cashflow.
Add to that free upside optionality of Business applications that could add a further 10 – 15% to the revenue base and you are looking at a 45M revenue estimate relatively realistically in a bull case scenario.
Valuation
GoDaddy (Domain & Ancillaries) – 3.75x FY’20 Sales w 10% growth
Wix.com (Web Builder) – 7.0x FY ’20 Sales w 25% Growth
NameSilo – 0.75x FY’20 Sales w 50% Growth.
That is not a typo, twice the growth rate at a tenth of the valuation…
I am not calling for it to trade at that valuation but you see where the BlueSky potential lies. If I only use a 2.0x Sales multiple on my fiscal 20 revenue estimate with a 65M share count and 80% equity stake I get a share price 1.11/share or 170% upside.
Strategic Value
Still think is company is prime take out bait. The big guys are in this space but are sub scale and don’t have the growth that Namesilo has. Given the valuation or larger peers this acquisition would be a drop in the bucket.
Personally, I think it makes more sense for a tech giant or PE firm;
Amazon – 507,806 Domains
Alibaba – 4,240,437 Domains
Google – 3,008,146 Domains
What is 50 - 100M for an acquisition of NameSilo to one of these tech giants… A drop in the bucket.
2x Sales is my base case on a takeout but I think you could see upside up to 4x sales as the growth rate persist and ancillaries roll out.
Conclusion
In summation, core domain growth accelerating with a under monetized user base that has the potential to double both Average revenue per domain and total domains in the next 2 to 3 years at a fraction of value to industry comps with Tech Giants circling.
These guys running it both on the ops side and investment company level looks like they know what they are doing, I think they have shareholders best interest in mind. Seems like they stole this company when they purchased it.
Sub 0.50/share… close your eyes and buy it. I did.
LONG