Square Space (NYSE: SQSP) made headlines on Monday after cutting its revenue outlook in its latest earnings update.
The company’s second-quarter results indicate it expects annual revenue of $857 million to $867 million, representing year-over-year growth of 9% to 11%. This figure is lower than previous revenue forecasts of between $867 million and $879 million.
The reduction in the revenue outlook came as the company said that had it not been for the impact of currency headwinds, it would have exceeded forecasts. Even so, revenue of $212.07 million 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 a platform for businesses and independent creators to build their online presence, grow their brands, and manage their internet businesses.
Its suite of integrated products allows users to manage their projects and businesses through websites, domains, e-commerce, marketing and planning tools, and tools for managing a social media presence.
The company, founded 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 broad product portfolio includes a range of tools to help different people and businesses create different types of websites, such as blogs or online stores.
Other features come from branding tools like email marketing, SEO tools, and video creation apps.
Currently, the company’s revenues are divided into “Presence” and “Commerce” categories.
Presence revenue comes from subscriptions to Squarespace plans that offer core platform functionality, while commerce revenue comes from enterprise plans that also offer additional marketing and e-commerce features.
In the second quarter of 2022, Presence revenue was $147 million and Commerce revenue was $66 million, with both segments increasing over the prior 12-month period.
Finance of SQSP actions
The company’s price-to-sales ratio is 3.10, just above the 2.9 average for the tech industry according to CSIMarket. This indicates that the stock might be slightly overvalued.
Since its stock market debut in May 2021, the company’s share price has followed a mostly downward trajectory, dropping 61% to $19.33 at the time of writing. However, this has been exacerbated by the general decline in tech stock prices since November 2021, pushing the stock even further from its IPO price.
SQSP growth potential
Website building and web hosting is a crowded market. The main competition of the company includes major players such as WixWordPress, Shopify, come on daddyWeebly and Webflow.
According to data from BuiltWith.com, Squarespace owns 17.4% of all websites using a hosted solution, compared to 40.9% for Wix and 19.8% for Shopify.
What differentiates Squarespace from these competitors is the complexity of its offering. The tools available to Squarespace subscribers offer much more hands-on website creation and management than competitors like GoDaddy and Wix, which instead seemed to prioritize ease of use.
For users looking to build complex sites without professional help, Squarespace seems to have an edge.
SQSP Investment Risks
As already mentioned, the company faces significant competition and has seen its share price drop significantly over the past 12 months. This decline was not as severe as that seen by some of its peers, but Godaddy in particular fared much better.
Additionally, revenue growth has slowed significantly over the past 12 months. While recently released second quarter earnings showed 9% year-over-year growth, the same period last year saw the company post 31% growth.
This deceleration could be due to a slowdown in digitization demand following the COVID-19 pandemic and associated restrictions on public interaction, but it could present a challenge for the business. This slowdown, coupled with lowered forecasts for the full year, clearly made some investors nervous.
Is Squarespace a good investment?
Squarespace investors back the company because of its future potential. They see a major player in website building and hosting, trying to carve out a niche as the most robust company in the game.
However, this means that the company’s growth prospects could be limited, especially since it has no equivalent to the free plans offered by some competitors. The impressive growth the company racked up in its early days in the public markets may have been just a side effect of the COVID-19 pandemic, as revenue growth is now slowing significantly.
You may choose to back Squarespace’s stock if you think its business plan of a wide and varied offering can win over its many competitors in the long run, but it’s hard to recommend the stock given the deteriorating stock. outlook and difficult environment.