New IPOs (initial public offerings) are exciting. It’s a chance for a new company to raise funds and position for rapid growth. For investors, it’s a great chance to consider a brand new company for investing.
They can also be confusing. What is this company? How do they make money? Should I invest in their IPO? Should I wait and see? Should I avoid the stock altogether?
SEMRush, a company that provides services and tools for digital marketers (mainly in the search engine optimization — SEO — space) filed its registration statement last week with the SEC, declaring its intentions to go public on the NYSE.
The company is looking to raise up to $100 million.
Here’s how some of the key financials for SEMRush played out in 2019 and 2020, according to their publicly available registration document (in thousands of dollars:
Revenue of $92.1 million in 2019, $124.8 million in 2020 (35.5% growth)
Sales and marketing costs of $41.7 million and $54.5 million in 2019 and 2020, respectively.
Net loss of $10.2 million and $7.01 million in 2019 and 2020, respectively
Net loss per share of 32 cents and 22 cents in 2019 and 2020, respectively.
The good
SEMRush is growing. Their revenues have increased significantly in just a year’s time, and their tools are used by leaders in the search marketing space.
They’ve also improved in some expense areas as well. Their cost of revenue went from 24.47 percent of their revenue in 2019 to 23.96 percent in 2020. Marketing made up 45.3 percent of their budget in 2019 and 43.65 percent in 2020.
The bad
Marketing cost
That sales and marketing cost has been talked about at length since the registration came out. A significant percentage of total revenue is spent on sales and marketing. In the registration, SEMRush acknowledges the sales and marketing costs. It includes salaries for marketing employees as well as direct advertising expenses.
The company was transparent in that it expects the cost to continue to rise in-line with revenue.
It’s a major cost, and one that is needed to acquire new customers.
Subscription model
Speaking of customers, that’s another potential bad. SEMRush is a tool that is built on the subscription model. Subscriptions these days can be fatiguing, and it might be something that customers start trimming the fat on.
SEMRush is not Netflix or Disney+, though. For most of its subscribers, the tools provided are fundamental for their work and livelihood. I don’t think this is a major thing to be concerned with. So long as the product remains viable and useful, subscriptions should stick.
A bigger concern is long-term subscribers. Once subscribers get the information they need from their SEMRush research, will they re-up?
My guess is yes. The search world is rapidly changing and new research is always needed for SEO gurus.
Customer growth
It’s worth questioning how many more people SEMRush can reach, though. Clearly, revenues have risen in 2020. How many search marketers still aren’t aware of SEMRush? And for those who are aware but not subscribing, why haven’t they been swayed yet, and how can they make their product more usable for search marketers in that boat?
The ecosystem
And finally, the biggest concern I would have with SEMRush is that most of their provided data comes from publicly available APIs.
There are several paragraphs in the registration doc explaining this point:
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.
It’s worth reading in full, but the gist is that SEMRush gets the data it provides to customers from publicly available APIs and third-party sources they pay for. It appears very little substantial information in SEMRush’s product is proprietary.
This in itself is not necessarily a bad thing, but what if any of these data providers decide to cut off access to some of this information? And what if Google finds ways to make pertinent data more easily accessible to search marketers on its own?
Furthermore, the ecosystem is at risk. Plenty of privacy lawsuits have come up or been discussed related to Facebook, Google, and the entire digital space. Google also nearly pulled out of Australia over its hesitancy to subsidize journalism.
Consumers are more mindful of privacy than ever (one of the reasons DuckDuckGo! is a big player in the search space all of a sudden). A lawsuit rendering Google’s data mining efforts illegal would make it more difficult (or impossible) for search engines to function as they do now than ever before, and hard for SEMRush to adequately provide its information to paying customers.
And finally, other players like Apple have been speculated as potential suitors to create their own search engine. While others, like Bing! have largely failed to gain a market share in the search engine game over Google, Apple’s presence in the colloquial consumer electronic market may be a player.
Who knows if a new major search engine would make data as available as Google. Apple has erred on the side of privacy whenever possible.
That would mean dominoes would fall throughout the space. Google pays Apple between $8 and 12 billion per year to be the phone’s default search engine.
This could all end up being non-factors, just like the risk factors for any company. No IPO is free from risk. It’s up to consumers to decide how impactful these are.
The bottom line of SEMRush’s IPO Registration
The company, clearly, is growing. They’re getting closer to profitability. SEMRush has a major presence in its space, and stands to gain if search engines continue to grow.
But external factors, including the entire search environment, could make it difficult for SEMRush, especially with other players like Google’s parent company, Alphabet ($GOOGL) watching closely.
SEMRush’s IPO could come as quickly as a few months from now depending on how their registration goes.