Godaddy: Valuation, Slower Margin Growth Move Citi To Sidelines

Citi has downgraded Godaddy Inc GDDY to Neutral from Buy on valuation and slower margin expansion.

GoDaddy shares are up over 38 percent from YTD lows (low was $23.88), have outperformed Citi Internet Index by about 2 percent YTD (index has returned 1.5 percent). Further, the shares are within 8 percent of its 52-week high (high was $35.35) and only 6 percent away from its $35 price target.

"While we remain constructive on the long-term growth outlook of the business, near-term valuation/upside potential, combined with the possibility of slower margin expansion and growth near-term cause us to move to the sidelines," analyst Mark May wrote in a note.

May noted that the stock is within 4 percent of $34, a level which it has been unable to hold in previous trading.

Further, May expects growth and margin expansion to slow, at least in the near term due to difficult comps in the high-margin Non-Domains revenue segments.

For 2016, GoDaddy expects gross margin expansion to be slower than in recent years, due to some merchandising tactics and the lapping of the growth of Office 365, which has been a major driver of growth in Business Applications revenue.

The company believes gross margin expansion should once again become more meaningful in 2017. But, the analyst differs saying that the delta between the growth of Domains and of Non-Domains has narrowed, meaning that the mix shift will provide only a moderate benefit to gross margins.

As a result, GoDaddy must find new avenues of operating leverage or introduce new high-margin products. However, this is unlikely to occur in the near term, thereby adding a degree of uncertainty.

"[W]hile we expect GDDY to continue to add roughly one million new paying customers per year, the law of large numbers is likely to impact customer growth, and acceleration in ABPU growth is unlikely to provide an offset," May highlighted.

Shares of GoDaddy closed Monday's regular trading session at $32.98.