NicoElNino
Company Overview
Semrush Holdings Inc (NYSE:SEMR) provides online visibility management and content marketing SaaS (software-as-a-service) platform. Its platform enables subscribers to increase their online visibility and drive traffic, including on their websites and social media pages, as well as distribute highly relevant content to their customers on a targeted basis across various channels in order to drive high-quality traffic to their online platforms. The company derives its revenues from the United States and the United Kingdom, and both regions accounted for approximately 56% of the total revenues of the company in 2021.
Investment Thesis
The key highlight for Semrush is the comprehensiveness of the solution. Its bread and butter are its search engine optimization capabilities, but it also offers market research, advertising analysis, content, and social media. Semrush’s business model is diversified with >82K paying customers and a pool of 537K free customers that it seeks to convert to paying customers. Although many of its customers are small-medium businesses (SMBs), its net retention was 126% in 2021, well above traditional SMB net retention.
Its platform is able to provide analytics against 21 billion keywords and crawl over 17 billion URLs per day. Its data set contains 200 million web domains and 41 trillion backlinks. Some of its data and corresponding insights have been amassed over more than a decade, providing a competitive advantage. Additionally, the diversity of third-party data sources helps mitigate potential regulatory risk factors.
Semrush has virtually fully exited its Russian operations with the exception of a few WFH employees that should complete their relocations in the current quarter. The relocation of these operations removes a significant business risk to FY23 growth, in my opinion, although it does push out the return to profitability to one additional year. With this move, I view SEMR shares as an attractive buying opportunity at the current level.
Diversified Business Model
Semrush has >82K paying customers and a pool of >537K active free customers that it seeks to convert to paying customers. Although paying customers tend to experience SMB-like churn, given Semrush’s focus on that market, customers that remain are stickier and grow their spending, as evidenced by 2021’s net dollar-based retention of 126%. Semrush profiles its customers well and has data to support visibility into customer churn, and does not see meaningful fluctuations in churn. The company’s revenues are also diversified, with more than half of its revenue generated outside the US in 2021.
Exit from Russia in Q2 reduces business risk
Semrush has closed its Russian office, sold the local entities, and has relocated nearly all of its Russian workforce out of the country. The company was able to wind down its operations in Q2 2022 while still exceeding earnings guidance during the quarter, demonstrating a highly efficient culture of execution.
However, the management noted that it is seeing some macro strain due to a choppy macro environment which is consistent with most tech companies. For a company that sells application software related to digital/online visibility with a high degree of SMB and international exposure, I view the results for the previous quarter remained relatively strong.
The company notes that June slowed, which carried into July as customers took longer to renew than in prior years, sought more favorable payment terms, or bought less. Semrush strikes a more optimistic tone on the rest of the year, noting that to date, August has been stronger and that it expects “slower growth in the third quarter before rebounding in the fourth quarter.” Given the setup, the rest of the remaining year is expected to remain slow in terms of growth. However, both Semrush’s commentary and implied Q4 guidance point to a potentially improving pace of business in Q4. Overall, the results are better than expected, especially in the context of Semrush’s SMB and international exposure and the considerable effort and resources required to wind down its Russian operations and relocate that workforce. While I expect some softness in Q3 on macro weakness, I remain positive on the long-term outlook and believe Semrush benefits from secular tailwinds as companies should increasingly seek to utilize the online visibility and competitive intelligence tools that Semrush offers.
Semrush’s efficient GTM strategy to scale up market
Semrush’s GTM motion is highly efficient, given it is largely driven by inbound sign-ups and leads. Roughly 50% of the company’s customers never interact with a salesperson and when they do, it’s because its inside sales team is acting on a highly qualified lead. I believe Semrush’s breadth of functionality, high-quality data, and frictionless sign-up motion allow the company to serve both the smallest and largest customers effectively. This is a unique model, especially in the crowded marketing software space, and the company can continue to win bigger customers over time without investing in a significant direct sales motion targeted toward the enterprise.
Self-service capabilities and Semrush Academy are key drivers of differentiation.
I believe Semrush’s highly efficient, product-led GTM motion, combined with its wide breadth of functionality, is driving significant differentiation in the increasingly crowded online visibility management space. Additionally, the value provided by Semrush Academy’s online training resources and certifications is also excellent. Having a best-of-breed platform alone is good, but the breadth of content and self-certification capabilities within the Academy seems to be a real differentiator as it drives more widespread usage, retention, and upskilling across an organization. Continuing to build out a robust offering of self-service training resources in the Academy has been a key priority for Semrush, as evidenced by the company’s recent acquisition of Backlinko in January. Over time, I think this strategy can drive further customer advocacy and consolidation on Semrush’s platform with partners and the opportunity to become an “industry standard” solution.
Risks
While I do maintain my overall bullish position, there are several risk factors that an investor should be aware of.
Web Scraping, Cookies
Semrush’s products are highly dependent on publicly available data and paid third-party data sources. Some of that data is obtained through web scraping, considered a gray area by some and something most websites attempt to block. Should the difficulty of web scraping increase, or some publicly available data become more restricted, then Semrush’s business could be harmed.
Macroeconomic Gyrations
While the market has experienced significant volatility recently, there continue to be risks in the market, and the relatively high SaaS software valuations, compared to other industries and the importance of growth, make these stocks more susceptible to volatility in the event of macroeconomic impacts.
Conclusion
The moving of operations out of Russia will bode well for Semrush in the future as it will enable the company to brand itself as a global company and reduce the business risk of operating from Russia in the current environment. The comprehensiveness of the solution, with its high retention ratio and operating in a segment that still has a lot of room to grow, is the reason why I am bullish on Semrush.
In my view, Semrush shares as an attractive risk/reward at current levels for investors looking to gain exposure to small-cap growth stocks.
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