Squarespace (NYSE: SQSP) is hitting the headlines on Monday after cutting its revenue outlook in its latest earnings update.
The company’s second-quarter earnings said it expected to achieve full year revenue of $857m to $867m, or year-over-year growth of 9% to 11%. This is below the previous guidance of revenue of between $867m to $879m.
The cut to revenue outlook came as the business said that without the impact of FX headwinds it would have topped guidance. Even so, revenue of $212.07m and earnings per share of $0.45 were still ahead of consensus expectations.
Additionally, unique subscriptions increased by 6% to 4.2 million and revenue per unique subscription also increased by 6% to $204.
What is Squarespace?
New York-based Squarespace operates platform for businesses and independent creators to build online presence, grow their brands and manage their businesses across the internet.
Its suite of integrated products enables users to manage their projects and businesses through websites, domains, e-commerce, marketing tools and scheduling, as well as tools for managing a social media presence.
The company, which was founded back in 2003, serves small and medium-sized businesses, and independent creators, such as restaurants, photographers, wedding planners, artists, musicians and bloggers.
How Does Squarespace Make Money?
The company makes the majority of its money from customer subscriptions, which are annual or monthly recurring revenue. Its wide product portfolio includes a range of tools to help different individuals and businesses create different kinds of websites, such as blogs or online shops.
Further functionality comes from brand building tools like email marketing, SEO tools and video creation applications.
At the moment, the company’s revenue is split into ‘Presence’ and ‘Commerce’ categories.
Presence revenues stem from subscriptions to Squarespace plans that offer core platform functionalities, while Commerce revenues are from the business’ plans which also offer additional marketing and ecommerce functionality.
In the second quarter of 2022, Presence revenue amounted to $147m and Commerce revenue sat at $66m, with both segments having grown over the prior 12-month period.
SQSP Stock Financials
The company’s price to sales ratio is 3.10, just above the average of 2.9 for the technology industry according to CSIMarket. This indicates that the stock might be slightly overvalued.
Since it debuted on the stock market in May 2021, the company’s share price has been on a mainly downward trajectory, falling by 61% to $19.33 at the time of writing. However, this has been exacerbated by the general decline in tech stock share prices since November 2021, pushing the stock down further from its price at IPO.
SQSP Growth Potential
Website creation and web hosting is a crowded marketplace. The company’s top competition includes major players like Wix, WordPress, Shopify, GoDaddy, Weebly and Webflow.
According to data from BuiltWith.com, Squarespace has a 17.4% share of all websites using a hosted solution, compared with Wix’s 40.9% share and Shopify’s 19.8% share.
What differentiates Squarespace from these competitors is the complexity of its offering. The tools on offer to Squarespace subscriber offer far more extensive hands-on website creation and management than competitors like GoDaddy and Wix, which have instead appeared to prioritize ease of use.
For users who are looking to build complex sites without the assistance of professionals, Squarespace looks like it might have something of an edge.
SQSP Investment Risks
As already mentioned, the company faces a significant amount of competition and has seen its share price fall significantly over the past 12 months. This drop has not been as severe as the fall seen by some of its peers, but Godaddy in particular has fared far better.
Additionally, revenue growth has slowed significantly over the past 12 months. While the recently reported second quarter earnings showed 9% year-on-year growth, the same period last year saw the company record 31% growth.
This deceleration could be due to a slowdown in demand for digitisation after the COVID-19 pandemic and the associated restrictions on public interaction, but it could present a challenge for the business. This slowdown, coupled with slashed full-year guidance, has clearly made some investors nervous.
Is Squarespace a Good Investment?
Investors in Squarespace are getting behind the company because of its future potential. They see a major player in the website building and hosting space, which is attempting to carve a niche for itself as the most robust business in the game.
However, that does mean the business’ growth prospects could be limited, especially as it doesn’t have an equivalent to the free plans offered by some competitors. The impressive growth that the company racked up in its early days on the public markets may have just been a side effect of the COVID-19 pandemic, as revenue growth is now slowing significantly.
You might choose to back Squarespace stock if you think its business plan of a wide and varied offering can conquer its many competitors over the long term, but its difficult to recommend the stock given the downgrade to outlook and challenging environment.