Semrush Holdings Inc.: Online marketing platform developer with growth potential of 87.5%

Why do we like SEMrush Holdings, Inc.?

Reason 1. Prospects for industry recovery

Tools to help engage potential customers through social media, search services and online venues are essential for any forward-thinking business in 2022. And the rapid pace at which search engines are improving requires companies to constantly review the effectiveness of the tools they use and adapt their approaches when necessary. There are many different individual offerings on the market, but Semrush offers all the necessary tools and solutions.

The current macroeconomic turbulence is putting pressure on the business, which is reflected in Semrush's financial results, further compounded by the company's increased costs associated with the relocation of employees from Russia. All this is affecting the stock price, which has fallen by 60% since the beginning of the year. But, as we know, as risks increase, so does the potential return on investment. And we believe investors will be able to get it in 2023.

• Inflation continues to decelerate faster than expected with the consumer price index falling to 7.1% from a peak of 9.1%. A further decline in the index would encourage the Fed to ease policy, which would be a stimulus for the economy.
• Two independent agencies (IAB and Matter Communications) conclude that most companies plan to increase their marketing spend in 2023. The IAB estimates that total advertising spend will increase by 5.9% year-over-year, and 63% of those surveyed plan to revise media plans more frequently (most on at least a monthly basis). Semrush offers suitable analytics tools on which to base this work. That said, the top 3 areas that Matter Communications says it plans to allocate marketing budgets to in 2023 can be covered by Semrush Holdings' solutions.

The long-term outlook for the direction also remains: ResearchAndMarkets forecasts the global SEO market to grow at a compound annual growth rate (CAGR) of 9.8% through 2028. Based on the number of companies in the United States and the annual recurring revenue (ARR) generated by clients in their respective segments, Semrush management estimates the global market opportunity for the company at $16 billion with a forecast to increase this value to over $20 billion in the future. Thus, the company has huge growth potential.

Reason 2. Maintaining company growth and effective customer retention

Semrush is showing good customer base growth — the number of customers increased by 17% quarter-on-quarter in Q3, partially offsetting a temporary decline in ARR growth by customer due to macroeconomic factors. The historical data in the chart below shows that despite the challenges, the company is growing revenue rapidly, with a CAGR of around 41% on the 2018-2022 horizon (including Q4 forecasts).

Note that in the more challenging years (2020 and 2019), the revenue growth rate decreased markedly. Semrush's net revenue retention rate (NRR, the percentage of recurring revenue retained from existing customers over a given time period) is 122%, meaning that revenue from existing customers is increasing. In our view, the company is well positioned to increase this figure in 2023 by increasing ARR on the customer base it has already accumulated this year, which in a positive market scenario could increase marketing spend.

The fact that Semrush, despite its small size, works with major clients, including Disney, Ebay, Salesforce and others, can also help to attract new clients. Thus, the company is actively building up its level of trust, which will subsequently help to further attract new large clients.

Financial indicators

TTM revenue: up from $170.7 million to $239.3 million

TTM operating profit: down from $0.7 million to $24.8 million

in terms of operating margins, decrease from 0.4% to -10.4% due to an increase in SG&A expenses from 63.3% to 71.8%

TTM net profit: down from -$0.2 million to -$23.8 million

in terms of net margin, down from -0.1% to -9.9%

Operating cash flow: down from $23.8 million to $5 million due to lower profit base

Free cash flow: down from $20 million to $2.1 million

Based on the results of the most recent reporting period:

Revenue: up from $49.3 million to $65.8 million

Operating profit: down from -$0.3 million to -$10.3 million

in terms of operating margins, down from -0.7% to -15.6% mainly due to an increase in SG&A expenses from 65.1% to 72.3%

Net profit: down from -$0.6 million to -$9.1 million:

in terms of net margins, down from -1.3% to -13.8%

Operating cash flow: down from $8.7 million to -$0.6 million due to lower profit base

Free cash flow: down from $16.8 million to -$2.3 million

The company is experiencing temporary pressure on profitability due to macroeconomic difficulties translating into lower target market spending, as well as increased operating expenses for the relocation of staff from Russia. Nevertheless, the company's revenues continue to show good growth and free cash flows are not going into deep negative territory. We believe that the company can improve its performance next year, which will be reflected positively in Semrush Holdings' stock price.

• Cash and cash equivalents: $246.6
• Net debt: -$246.6 million

In the face of temporary deterioration in financial performance, it is important that the company's net debt is in the negative range and that there is enough cash and cash equivalents on the balance sheet to survive turbulent times without a noticeable decline in financial strength.

Evaluation

In terms of TTM trading multiples, the company is undervalued to its peers on EV/S and P/B, while the other multiples, like most peers, are in negative territory.

Source: Refinitiv

By the end of 2022, the company's management expects revenues in the range of $252.8-$253.3 million, which would indicate a year-on-year growth rate of 34%-35%. We believe the forecast is realistic given the current market conditions and do not expect significant deviations from expectations.

Ratings of other investment houses

The minimum price target set by Jeffries Financial Group is $10 per share. Stifel Nicolaus has in turn set a target price of $20 per share. According to the consensus, the fair value of the stock is $14.60 per share, which implies a 87.5% upside potential.

Key risks

• In the event of significant technological changes in search engines affecting the effectiveness of the solutions Semrush offers, the company will have to invest in the development of new algorithms.
• A further deterioration in the economic situation could significantly reduce the company's growth rate.
• Semrush's solutions depend in part on third-party data, an area where the company may face difficulties if additional regulation is introduced.