GoDaddy Stock Up 5% Today – Time to Buy GDDY Stock?

The price of GoDaddy stock is going up 5% this morning in pre-market stock trading action following news that an activist investor reportedly bought a large stake in the web solutions provider.

According to an exclusive report from the Wall Street Journal, Starboard Value, a New York-based hedge fund founded and led by Jeffrey Smith and Mark Mitchell, picked up a 6.5% stake at the firm. The investment would be worth around $800 million based on GoDaddy’s market capitalization at the moment the report was written.

Starboard’s positive track record of successful activist campaigns may be the reason why shares of GoDaddy stock are going up today as investors could be expecting that the hedge fund’s participation in the Board of Directors could lead to an improvement in the firm’s financial and operating performance.

What can be expected from this tech stock in light of this development? In this article, I’ll be assessing the price action and fundamentals of GoDaddy stock to draft plausible scenarios for the future.

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GoDaddy Stock – Technical Analysis

The price of GoDaddy stock has been on a downtrend since February this year but the decline accelerated after the company’s Q2 2021 quarterly earnings report as the web hosting company failed to live up to the market’s expectations for the full 2021 fiscal year.

Even though the stock attempted to recover from that major decline after the company reported better-than-expected earnings and revenues in Q3, the price action failed to move above the 200-day simple moving average.

This led to a swift decline in the stock price shortly afterwards and prompted GDDY to tag the lower bound of the downward price channel for a third time.

Today’s pre-market uptick is once again attempting to push the price above the 200-day SMA. However, despite the involvement of Starboard, it is still too early to tell if market participants will jump on board with the idea that there will be a substantial improvement in the firm’s fundamentals as a result of their participation in the company.

Confirmation of a full-blown trend reversal at this point would be obtained if the price climbs above the $90 level – GoDaddy’s stock most recent lower high.

For now, the outlook is neutral-to-bullish with a potential short-term target set at around $84 per share as market participants may take advantage of the positive momentum resulting from the news today to fully close the bearish price gap left behind after the firm published its Q2 earnings report.

GoDaddy Stock – Fundamental Analysis

GoDaddy’s revenues have been growing lately but not as fast as they were back in 2013-2014. Last year, the company pushed its top-line results 11% higher despite the strong tailwind provided by the pandemic to most tech companies.

Meanwhile, operating margins have been deteriorating lately, moving from around 70% in 2017 and 2018 to 38.5% last year and 22% this year. Moreover, the company’s bottom-line performance has been volatile and that is one of the reasons why the valuation of GoDaddy has been quite erratic in the past few years.

As per its balance sheet, the firm reported long-term debt of $3.86 billion in its last quarterly report on assets of $7.3 billion including $4.9 billion in goodwill and intangibles and $1.14 billion in cash and equivalents.

GoDaddy’s elevated leverage ratio is one of the aspects that Starboard could seek to improve, especially if one considers that interest expenses are eating up around a third or more of the firm’s bottom-line profitability.

GoDaddy’s free cash flow generation capacity is quite positive but the company has made a significant number of acquisitions in the past that failed to yield positive results thus far.

At its current market capitalization of $12.7 billion, the firm is trading at roughly 3 times its forecasted sales for 2022 and 24 times its forecasted adjusted earnings per share for that same year.

Those multiples are quite conservative for a tech company. However, GoDaddy’s elevated financial leverage and erratic earnings-generation capacity may justify this depressed valuation.

Moving forward, if Starboard’s involvement in the company results in a material improvement in the firm’s financial performance, including a deleveraging of its balance sheet, chances are that this could lead to market participants assigning a higher trading multiple for GoDaddy stock.

However, it is still too early to tell if such a scenario will unfold. Therefore, the outlook for the stock remains neutral to slightly bullish based on the technical assessment outlined earlier in the article.

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