This week, Squarespace (SQSP) went public through a direct listing on the NYSE. This means that the company bypassed traditional Wall Street investment bankers and issued shares directly to the public. As a result, the proceeds went to the insiders, not to the company. (See IPO calendar on TipRanks)
Squarespace operates a leading platform to create websites and apps. While the industry has been around since the early days of the internet, the company has carved out a niche as a provider of easy-to-use tools to allow for immersive designs.
As the IPO document explains, “We believe design is not a luxury. Our beautifully-designed, award-winning templates enable our customers to look professional from the start, while also providing deep levels of customization so that no two websites look alike. This empowers our customers to stand out and express their story and brand in a beautiful, engaging and consistent way across digital channels, including websites, social media and Email Campaigns, among others.”
Nonetheless, the reception for the IPO was icy. On the first day of trading, shares of Squarespace plunged by about 13% to $43.65. This put the market capitalization at $6.4 billion. Earlier in the year, the company had pulled off a secondary offering of securities at a $10.2 billion valuation.
Despite the disappointing numbers, Squarespace’s ability to complete the deal was a major achievement. Given the wrenching volatility in the markets, various companies have postponed their deals.
Company Background
In 2004, Anthony Casalena founded Squarespace while he was at the University of Maryland. The initial business was a blog, and he grew the company organically until 2015. That’s when he raised the first round of venture capital of $78.5 million.
Currently, Squarespace is a full-blown platform that offers hosting and domain services, e-commerce tools, social media capabilities, and marketing systems. It even has a reservation service for restaurants, which came through the acquisition of Tock.
Unlike many other tech IPOs, Squarespace has been consistently profitable. Last year, net income was $30.6 million, although this was down from $58.2 million in 2019. Then again, the company has been ramping up its investments in R&D, sales and marketing to remain competitive.
In terms of the growth, the company’s metrics have been decent. It showed a 28% increase in revenue in 2020 to $621.2 million. Currently, the company has 3.7 million unique subscribers.
The target market for Squarespace is small and medium size businesses (SMBs). And yes, this is a large opportunity. According to the company’s research, there are more than 800 million small businesses and self-employed people across the globe. In the U.S. alone, about 540,000 new business are created each month, and roughly 46% of SMBs do not have a website.
Bottom Line on Squarespace
There are certainly some red flags to watch out for in the Squarespace IPO. First of all, the market is intensely competitive. The company must contend with tough rivals like Shopify (SHOP), GoDaddy (GDDY), and Wix (WIX). There are also other large tech companies moving into the space, such as Square (SQ).
Another issue for Squarespace is its valuation. Note that the shares are trading at 10 times revenues, which is certainly rich, given the growth rate.
Besides, Wall Street continues to be downbeat on tech IPOs, and this trend could last awhile. As economies start to re-open, investors seem to be more interested in traditional businesses that are poised for a jump in growth.
Therefore, even though Squarespace has built a strong platform, the stock does not look particularly attractive right now.
Disclosure: Tom Taulli did not have a position in Squarespace stock at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
