SEMrush Continues Spending Into Uncertain 2022 Environment (NYSE:SEMR)

A Quick Overview of SEMrush

SEMrush Holdings, Inc.NYSE:SEMR) went publicIn March 2021, the company raised $140 million in gross proceeds through an IPO at $14.00 per share.

The company operates a SaaS platform business.It allows businesses to execute and manage online marketing campaigns.

Given the uncertainty in the current economic climate and management’s stated expectation of “maintaining the higher levels spending” through 2022, I am cautious about SEMR. Therefore, I am on Hold for its future prospects.

SEMrush Overview

SEMrush is a Boston, Massachusetts-based SaaS firm that “provides companies with comprehensive and practical insights to drive traffic to their websites.”

Oleg Shchegolev is the CEO and co-founder of the company. He previously earned a Masters in Computer Science from St. Petersburg State Polytechnic University.

The company’s main offerings include:

• SEO

• Advertising

• Content Marketing

• Social Media

• Market Research

The company targets customers primarily via online advertising, which includes paid advertising, social media and search engine optimization.

The firm has over 200 million domains and 20 billion keywords. It also has 33 trillion backlinks and 17 billion URLs.

Market & Competition

According to a 2020 Market Research reportGrand View Research estimates that the global digital marketing software market reached $43.8 billion in 2019 and will reach $158 billion by 2027.

This forecast CAGR is 17.4%, which is very strong, and will continue to grow from 2020 to 2027.

The main drivers of this expected growth are the adoption by retailers of location-based marketing services and an Omni-channel approach to customer acquisition and retention. Also, there is growing usage and popularity of video advertising and social networking marketing.

Below is a historical growth trajectory and a projected future growth trend for digital marketing software in America:

The firm sees potential competition in the following industries:

• SEO

• SEM

• Digital PR

• Content Marketing

• Social Media Management

• Competitive Intelligence

SEMR’s Most Recent Financial Performance

• The quarter-end topline revenue has increased significantly over the past 5-quarters:

• The trend of gross profit per quarter is similar to that of topline revenues:

• Recent quarters have seen operating income close to breakeven.

• Earnings Per Share (Diluted), have been on a similar track to operating income.

As the chart below illustrates, SEMR’s stock prices have dropped 49.2 percentage over the past 12 month compared to the U.S. S&P 500 index’s decline of 0.8 percent.

SEMrush: Valuation Metrics

Below is a table with relevant valuation and capitalization figures for the company.

(Source)

Commentary on SEMrush

The management highlighted 75% year-over year growth in the number of customers it considers “larger,” which is those that pay more than $10,000 annually, during the Q4 2021 earnings conference.

Marketing-wise, the paid search channel set a monthly mark in November for new customer additions. Management also plans to start its first-ever brand campaign in March.

As it seeks new revenue growth opportunities, the firm continues building out services that are adjacent to its core SEO platform.

The company plans to add functionality in video to help customers gain online visibility and traffic.

The company’s financial results showed that Q4 topline revenues increased 47% over the prior year, with growth “driven both by an increase of paying customers and an improvement in the average revenue per client.”

Revenue growth was also a result in improving revenue mix. Nearly 66% came from customers who purchased the two higher priced subscriptions.

The firm’s dollar based net revenue retention rate ended 2021 at 126%. This impressive result indicates strong product market match and marketing efficiency.

For Q4 and 2021, expenses were up in marketing and G&A, as well as R&D investment, as the company continues to scale.

Management expects Q1 2022 to see a 40% increase in revenue and full-year revenue to rise by 30% over 2021. Non-GAAP losses for 2022 will be approximately $22 million. The bulk of these losses will be in the second and third quarters as we increase our marketing investments.

Concerning valuation, SEMR’s enterprise valuation / revenue multiple is valued by the market at approximately 6.4x. This is significantly lower than the average Q1 2022 run rate valuation multiples, as shown below.

The company’s primary risk is whether it can continue growing quickly in a difficult business environment. This could be due to rising interest rates or a possible economic contraction throughout 2022.

My outlook on SEMR is cautious given the uncertainty in the current economic climate and management’s stated expectation of “maintaining the higher levels spending” through 2022. For the near term, I am on Hold.