Similarweb Ltd. (SMWB, Financial) is a software company that specializes in digital marketing data. The business had its initial public offering in May 2021, but since then its stock price has plummeted by over 68%. A positive is this was mainly driven by macroeconomic factors as interest rates rose and valuation multiples compressed. As an individual business, Similarweb has still been growing and producing solid financial results.
Understanding the business model
Similarweb has created a software platform that specializes in web and data analytics. Its core diigital marketing data includes estimates of website traffic, referred websites, traffic source information, competitor paid advertisements and much more.
The company estimates a staggering $44 billion total addressable market based upon 850,000 businesses, which could pay around $4,333 per month or approximately $52,000 per year. Therefore, given its target is companies with over 100 employees, that does not seem to be unreasonable.
Its forecasted TAM in the marketing analytics space is close to $6.1 billion and its audience analytics segment is $5.65 billion. Similarweb also believes it has an untapped opportunity to supply investors with alternative data. I believe this is a huge opportunity, given the market is getting harder to beat, so investors will look to alternative means to gain an edge.
Similarweb has expanded its offerings to include to shopper intelligence and sales i ntelligence. This is a great strategy as I see parallels with HubSpot, which created a “multi hub” approach to generate an increasing number of upsells and crossells.
Its sales intelligence platform is interesting as it enables business-to-business companies to identify their ideal customer profile through a firmographic data such as company size (employee count), location, industry, etc. The data also provides salespeople with the contact details of the decision makers such as C-level executives. A challenge with this industry is its fiercely competitive, with Zoominfo (ZI, Financial) taking the top spot and LinkedIn Sales Navigator coming in at number two, according to reviews at G2. However, I believe Similarweb can still gain traction in this market through cross-selling from its core platform.
Integration of AI features
Similarweb is a really a data company at its core and, therefore, there is huge potential to integrate artificial intelligence. The business recently launched SimilarAsk, a generative AI tool that enables users to type questions and get answers on their data. It is still early for this product, so multiple improvements are expected to come down the pipeline within the next year.
Reviewing the financials
Similarweb reported solid financial results for the second quarter of 2023. Its revenue of $53.7 million rose by 13% year over year. This was ahead of management's guidance, though it came in slightly below the analyst consensus forecast.
The top line was driven by a 12% increase in its customer base to 4,300. Its average customer spend also rose to $51,000, which is solid and indicated the $4,300 price mark is tangible for businesses.
Its dollar-based net retention rate was 101%, down slightly from the 115% in the prior-year quarter.
Its larger customer segment (with $100,000 in ARR) had an NRR of 109% and represents 55% of total annal recurring revenue.
The business did report challenges when it came to expansion with its existing customers. In addition, some of its customers had to reduce spending to fit the product into their corporate budgets, while still continuing to be a customer.
A positive is 42% of ARR was generated from customers in multiyear contracts and this has continued to grow steadily.
Another positive is the business has a strong “top of funnel” with 25 million unique visitors using its free tool. This is expected to grow to 100 million in 2023. Therefore, one could assume a portion of these would convert.
Examining margins and balance sheet
Moving on to profitability, Similarweb reported a gross margin of 80%, up 35% year over year, which is huge.
However, the business is still unprofitable with an operating loss of $9.8 million reported in the second quarter. A positive is this is an improvement from the $25.6 million reported in the prior year.
The company is investing around $13.9 million into research and development expenses. Therefore, the business could be profitable in a traditional sense, but would prefer to invest into the future, which I agree with.
Despite this, management has plans to become profitable and generate positive free cash flow sustainably.
In the meantime, the business has a strong balance sheet with $73 million in cash and short-term investments. In addition, it has total debt of $68.8 million, which is well covered.
What's the valuation?
Unlike most software companies, Similarweb trades at a reasonable price-sales ratio of 2.4, which is lower than historic levels.
Concluding thoughts
Similarweb is a great software company that is in the early stages of building out a multi-product suite. I believe its user interface is great, but the company does face a challenge when trying to separate itself from low-value marketing tools and competitors such as Semrush (SEMR, Financial). However, its new AI feature could give the business an edge if it can rapidly iterate to create a strong value proposition.
