I recently initiated a small starter position (< 1%) in Semrush, an “online visibility management and content marketing SaaS platform.” I personally just think of them as a powerful SEO & SEM tool. As someone who works in marketing, who actually started his career in the SEO space, I am very familiar with Semrush as a tool and have always been impressed with their low-cost SEO & SEM solutions.
When I worked at Sears Holdings Corporation years ago, I actually used or piloted several Enterprise SEO tools: SEO Clarity, Conductor and BrightEdge. While these three platforms were incredibly sophisticated, had beautiful UI’s, and were quite powerful, they also cost a considerable amount of money. I found after managing an SEO and Content team for a number of years that these platforms simply cost too much which impacted your ability to drive a positive ROI from your software spend.
So when I joined Sprout Social later, a company with a considerably lower marketing budget, I had to find an SEO tool that would enable my SEO team to quickly find SEO insights at an affordable price. We ended up having to decide between Semrush and Ahrefs which were both SEO solutions that catered to the SMB space. We ultimately ended up going with Ahrefs, but it was pretty close and after using Ahrefs for a number of years, it became pretty apparent that you didn’t need to spend 5 or 6 figures on an SEO platform when $1,200/year for one license could basically do the same thing. When I joined Wyzant, we ultimately ended up using Semrush and this was a perfectly adequate tool for my SEO team’s daily needs and it only cost $2,400/year for two licenses.
Anyway, the point of this background story is that as someone who is experienced in SEO & SEM and is familiar if not proficient in most search solutions, you don’t need a super expensive tool to do your work and this is why Semrush caught my eye as a potentially interesting investment. I think one of its competitive advantages is simply the fact that it has a powerful product that does a lot of different things and costs way less than those enterprise SEO tools. So there’s this huge pricing gap that Semrush could easily take advantage of between “SMB” type of SEO & SEM solutions and enterprise SEO solutions. I wouldn’t necessarily say it’s “pricing power” but maybe it is since if the next best alternative is going to cost you at least $15k annually and you’re only paying $2-3k annually, there’s definitely some room to increase your prices. (Which they did recently!)
The SEO, SEM, Content Marketing platform space is pretty crowded with a wide variety of solutions. I personally think there are a few competitors for each category Semrush competes in:
SEO, SEM, & Content
- BrightEdge (Enterprise)
- Conductor (Enterprise)
- Botify (Enterprise)
- DeepCrawl (Enterprise)
- Ahrefs (SMB)
- Moz (SMB)
- SimilarWeb (Enterprise)
Social Media Management
- Sprout Social (SMB – Enterprise)
- Sprinklr (Enterprise)
- HootSuite (SMB)
- Buffer (SMB)
I would consider Semrush to be an SMB to mid-market solution but could easily be used by large enterprises and agencies. They are priced really competitively with monthly contracts starting at $119.95/month or $1200/year annually vs. the BrightEdge/Conductor/Botify’s of the world that cost generally around $15k annually minimum, if not more.
Financials – Revenue
Semrush is a fast-growing small-cap stock. They have a market cap of $3.59 B as of August 27th.
They announced Q2 ‘21 earnings on August 9, 2021, and it was a pretty solid earnings report. Revenue came out to $45 M, a 58% YoY increase and 12.5% sequentially. This was an acceleration in revenue versus the 44% they did in Q1 ‘21 and 41.3% they did in Q4 ‘20. Granted, this was also an “easy comp” given that we are comparing vs. Q2 ‘20 which was when the pandemic was negatively impacting all businesses around the world. However, despite this “easy comp” their guidance for Q3 ‘21 was strong. They guided for $47.7 M in revenue, a 48% YoY increase, 6% sequentially and they raised FY ‘21 guidance from $175-177 to $182-184, a 4% increase.
Since Semrush is a recent IPO, having only gone public on March 24, 2021, less than 6 months ago, they only have one earnings report under their belt. In that report, they guided for Q2 $42.2 to $42.7 in revenue, a 50% YoY increase in revenue and 6.8% sequentially and they beat their guidance by 5%, so assuming Semrush is able to beat by 5% again, Q3 revenue should be around $50 M, good for 55% YoY in revenue and 11.7% sequentially.
I’ll be honest, this is the part that I struggled the most with and the reason for my smaller than usual starter position (I usually start with a 1.5-2% position after doing a lot of DD). While I think Semrush will beat their Q3 guidance, we’ve seen a lot of companies get in trouble with revenue or guidance in Q2 due to the economy reopening which means more people traveling and less focused on procuring business software solutions. So it’s hard to say if they will definitely hit the top end of their guidance and then some. Even in the earnings call, their CFO said:
Yes. Mike, I think you might have mentioned there is some outlay, there is some pull-forward from, say, this back-half of the year given out strong the first-half was on, say — on the back of the year opening that we see across the board. So, as you may see from our guidance, our outlook for the — say, for Q3 and for the back-half of the year, I would say is slightly more moderate as we would need to see how the situation unfolds across the globe in different markets.
I tend to only invest in companies that I’m really confident that they will continue to execute based on their past history but COVID has definitely caused some interesting business scenarios. Moreover, this is a company that just recently IPO’d, so they don’t have a huge track record, so I tend to be more conservative on my initial investments.
Financials – Net Revenue Retention
As with all SaaS solutions, NRR is a very important metric to review. Semrush’s NRR is pretty good and has slightly accelerated QoQ and YoY:
2020: 114% (Management says that this was due to COVID)
Q1 ‘21: 116%
Q2 ‘21: 121%
So in their most recent earnings report, Semrush has increased their NRR by a decent bit and during the earnings call stated that they have a number of add-ons and opportunities to potentially continue to increase NRR.
Financials – Gross Margin & Annual Contract Value
Gross margins continue to increase over time:
Q1 ‘21: 78.0% vs. 76.2% in Q1 ‘20
Q2 ‘21: 77.3% vs. 75.2% in Q2’ 20
In one of the investor slides, Semrush stated that their long-term GM target is 80%, so it looks like the company is on the right track with increasing margins YoY. To be clear, 80% gross margins is really good and likely on the higher end for most SaaS-based solutions.
Semrush appears to be increasing their Annual Contract Value (ACV) by a decent amount. In Q2 ‘21 their average deal size increased by 19% which is an improvement from 2020 vs. 2019 which increased only 12%. Per management, their add-ons are helping as they recently increased their pricing, so this should help ACV’s in the future.
Financials – Cash Flow & Operating Income
Semrush had positive operating and free cash flow in Q2 ‘21 but there was a sequential decline in cash flow due to increased marketing and G&A spend. Nothing I’m too worried about though. They’ve been FCF positive for the past few years and have $180 M cash on their balance sheet.
For the past two quarters, Semrush has been “profitable” (barely) both on a GAAP and Non-GAAP perspective. Their R&D spend is a little light in recent quarters while their G&A has ticked up, so I’d like to see that reversed since you want to continue to invest in your product. This is a company definitely showing some decent operating leverage. Their long-term target of 20% operating income I think is very doable.
Business – Customers
Semrush saw a 29% YoY increase in customers to > 76k in Q2 ‘21, in line with Q1’s increase in customers but a slight deceleration sequentially from 7.5% to 5.6%. Q1 operationally was a smashing success for them, so I’m not too worried about a slight deceleration. If it continues though, something to monitor especially if it goes down to 2-3%.
Semrush currently has a TTM EV/S of 22.2 with a market cap of $3.59 B. For a company that is projected to grow 45-50%, this is a company that is undervalued in my opinion relative to its peers.
Comparable companies in the martech space are:
- Sprout Social ($SPT) is a social media management platform with a TTM EV/S of 39 and is projected to grow 35-40% this year
- HubSpot ($HUBS) is an inbound marketing, marketing automation, and CRM platform with a TTM EV/S of 29.5 and is projected to grow 40-45% this year
I think there may be a few reasons why this company is currently heavily discounted. The first is that it’s a recent IPO that doesn’t have a lot of awareness yet. Sprout Social had a similar issue when they first IPO’d.
The next is that a significant portion of Semrush’s operations are located outside of the US. Specifically design and development is conducted in Russia, Czech Republic, Cyprus and Poland. (This is per their S-1), so there is geopolitical risk and currency risk.
I personally think the recent IPO and lack of name recognition is probably the biggest reason they’re undervalued. When you look at other recent IPO’s such as Asana ($ASAN) and Monday.com ($MNDY), it took a few strong beat & raise quarters before they saw some significant multiple expansion. Sprout Social ($SPT) also took a few quarters before they saw their multiple expand.
Monday.com’s EV/S multiple
Asana’s EV/S multiple
Sprout Social’s EV/S
Final Remarks & Outlook
As noted, I only made a small investment in Semrush since I was intrigued by their business given my background in SEO and I was impressed with their business fundamentals.
I made my initial purchase at $21 a few weeks ago and am happy to report that the stock is now trading at $26.52, so a solid 25%+ gain in the past few weeks. I do not plan on adding to my position until I get a chance to review their Q3 report since I’m curious how the reopening impacted their overall business. If they beat their revenue and guidance again by 4-5% or so, I will likely add considerably to this position since this would mean several quarters of 10%+ sequential growth which means they will likely do 40%+ growth next year if they continue to execute which is a really strong growth rate.
Also, for a company with such a “low” EV/S multiple, another strong few quarters could very well cause Semrush’s stock price to double since the company will likely see some significant multiple expansion which is the biggest accelerant when it comes to share price appreciation. Assuming Semrush is able to earn an TTM EV/S on par with Sprout Social (which I think is fair given their faster revenue growth), in theory this stock could see $50+ by February 2022. This of course assumes macro factors stay the same and tech multiples continue to stay elevated as they are right now.
Disclosure: Long shares of $SEMR since $21.xx.
I am not a financial advisor. Do your own due diligence.