If you’ve dabbled in Search Engine Optimisation (SEO), you’ve probably heard of Semrush. When I first heard of them years back, they were one of the few reliable companies in the space offering keyword research solutions. Today, they’re branded as an “Online Visibility Marketing Platform” which promises to help businesses:
Since 2008, they’ve grown their suite of services and their user base.
Semrush files for IPO
On 1st Mar 2021, Semrush filed for IPO on the New York Stock Exchange (NYSE). According to Renaissance Capital, they plan to raise $252 million by offering 16.8M shares, at a price range of $14 – $16. Semrush will be listed on NYSE under the ticker SEMR after the IPO.
So…in this article, I’ll explore if SEOs should invest in SEMrush, or would this be the sequel to ARMYs losing money on Big Hit’s IPO?
Disclaimer: I’m just a digital marketer, not your financial adviser. Do your own due diligence. No, this post is not sponsored, but if Semrush wants to send us a free membership, ping me 😉
What’s Semrush?
This section is included for the sake of the non-SEO investors, skip to the next section if that’s not you.
Semrush is a Software-as-a-service (SaaS) company that identifies themselves as an “online visibility marketing platform”. Their suite of 50+ tools help businesses to make more money by improving their online presence.
Their tools can help marketers with Search Engine Optimisation (SEO), Pay Per Click marketing (PPC), Social Media Marketing (SMM), Keyword Research, Competitive Research, PR, Content Marketing, Marketing Insights and Campaign Management.
Paying customers have access to a huge database of actionable insights from over 200M websites, 20B backlinks, 310M Google banner ads and more.
Semrush’s Business Model
Like most SaaS companies, Semrush deliver their services through a subscription model. This gives them a stream of recurring revenue which we’ll talk about in the next section.
Semrush’s financials
2020 was a bumper year for tech stocks, I think Semrush might have wanted to ride the wave of investor interest hence the IPO. To file for IPO in the US, companies will need to submit a S-1 form that reveals their financials. Here’s Semrush’s S-1.
Here’s a quick summary:
The Good
- Growing base of users
“As of December 31, 2019 and 2020, our differentiated platform empowered over 334,000 and 404,000 active free customers, respectively, and over 54,000 and 67,000 paying customers, respectively, in over 135 and 142 countries, respectively.”
Semrush grew their base of paying customers by about 13,000 (~24%) and expanded to 7 new countries in 2020.
- Positive Net Dollar Retention (NDR)
Net dollar retention gives us an idea of the changes in recurring revenue over time. A NDR of >100% suggests that a company can grow without gaining new customers.
According to Semrush, their dollar-based net revenue retention rate was “120% and 114% during the years ended December 31, 2019 and 2020, respectively”.
Is that good or bad?
This may not be a fair comparison, but for starters, let’s compare it with SaaS stock darling, Zoom (NASDAQ:ZM) whose NDR is about 130% according to Public Comps.
- Growing Annual Recurring Revenue (ARR)
Annual Recurring Revenue tells us how much revenue a company can expect to receive, based on their yearly subscriptions. Semrush offers both monthly and annual subscriptions, these would be annualised to derive their ARR.
In their S-1, their ARR was $102.6M in 2019 and $144.2M in 2020, which is about 41% growth. Comparatively, Fastly (FSLY) has a ARR growth of 40.5% while Cloudflare (NET) is at 50.1%.
- Decreasing Net Loss
“For the years ended December 31, 2019 and 2020, our net loss was $10.2 million and $7.0 million, respectively.”
Semrush reports a drop in net loss between 2019 and 2020. However, do take note that this is just 1 year of data, plus 2020 was also the bumper year for tech stocks.
- Available Market Opportunity
According to Grandview Research, the Digital Marketing software market size is “is expected to register a CAGR of 17.4% from 2020 to 2027″, it was valued at USD 43.8 billion in 2019.
On the company’s front, Semrush believes that as more companies move online, the fight for customers’ attention will intensify, hence more companies will realise the need to increase their online visibility. They value their global annual potential market opportunity to be over $20B.
The Bad
- Sales and Marketing relies on a big team
For SaaS companies, sales and marketing (S&M) is the main way of acquiring customers.
In 2020, Semrush spent $54M, up from the $42M in 2019 (31% increase). This translated to a revenue of $124M in 2020, an increase from $92M in 2019 (36%).
However, if we looked at their breakdown of the increase:
$5M (~41% of S&M) was allocated into “Personnel Costs”, which basically is salary. They had increased their sales team headcount by 10% in 2020 to grow.
This creates the question of whether they’ll need to keep expanding their sales team in order to grow in the future.
- Potential Business Risks
Semrush notes the main risks to their growth. Here’re some highlights:
Reliance on third party data sources
“Our products depend on publicly available and paid third-party data sources, and, if we lose access to data provided by such data sources or the terms and conditions on which we obtain such access become less favorable, our business could suffer.”
Price Sensitive market
“Demand for our platform is also price sensitive. Many factors, including our marketing, sales and technology costs, and the pricing and marketing strategies of our competitors, can significantly affect our pricing strategies.”
Highly competitive market that requires constant R&D and up to date tools
In their own words:
“Many of our current and future competitors benefit from competitive advantages over us, such as greater name recognition, longer operating histories, more targeted products for specific use cases, larger sales and more established relationships or integrations with third-party data providers, search engines, online retail platforms, and social media networking sites, and more established relationships with customers in the market.“
Would I invest?
Sorry, you had to go through that long article to get to this. But no.
I’m no SEO, but to my knowledge SEO is a competitive and rapidly changing industry. Solution providers will have to be on their toes to keep abreast of all the changes, while trying to inch improvements in their offerings. Hence, they’ll need to spend quite a bit on R&D just to stay in the game.
Also, SEO isn’t a function that is carried out by every company – most would outsource it to agencies or freelancers. This would suggest that the potential market size may be rather limited.
Don’t get me wrong, Semrush is a trusted brand in the SEO space but SEOs could end up as the next ARMY.
Would a profitable SaaS investor put his money in this?
Now, don’t just take my word for it. I roped in Dr Wealth’s SaaS hypergrowth investing trainer to share his views:
“I don’t understand the SEO industry enough, but their numbers don’t entice me. There are better opportunities, hence I wouldn’t invest.”
Cheng
He also added; “you should ask the following questions in your analysis”:
- How sticky is their platform for people who wants SEO solutions?
- Are they growing faster than their competitors?
Should you invest in Semrush?
It depends. 😅
If you’re looking for a stock with hypergrowth potential, there may be better stocks out there with stronger prove of growth.
If you’re bullish on the growth of the SEO scene and Semrush’s ability to dominate market share in a highly competitive industry, go ahead.
If you’re looking to show your support to Semrush, then it’s up to you. I mean, buying a subscription could be a better way to support them you know…
Also, do your own analysis, here is Semrush’s S-1.