GoDaddy: Embracing AI To Improve Products And Margins

GoDaddy (GDDY) shares have declined over 26% year-to-date, contracting its valuation multiple from 30x to 19x NTM EBIT, despite beating H1 2024 revenue and EPS expectations. The company, a leading web services provider, reported 8% Q2 2025 revenue growth and a 340bps operating margin expansion to 21.9%, primarily driven by its higher-growth Applications & Commerce segment. While direct AI impact on revenue is modest, internal AI tools are significantly improving operational efficiency and driving margin expansion, with management targeting 33% EBITDA margins by 2026. The analyst views the sell-off as overdone, assigning a buy rating, noting the stock trades at a 23% discount to its fair value of $192 per share, supported by its market leadership, recurring revenue, and ongoing margin expansion.

Analysis

GoDaddy's (GDDY) stock has undergone a significant valuation reset, declining over 26% year-to-date and contracting its NTM EBIT multiple from 30x to 19x, despite delivering stronger-than-expected revenue and EPS in the first half of the year. Recent performance highlights the company's fundamental strength, with Q2 2025 revenue growing 8% year-over-year and operating margins expanding by a robust 340 basis points to 21.9%. This margin improvement is primarily driven by a strategic shift towards the higher-growth (14% Y/Y) and higher-margin (44% EBITDA) Applications & Commerce segment, which is increasingly offsetting the mature, lower-margin Core business. While the direct revenue impact from its new AI tools is currently limited, the technology is providing a significant tailwind to profitability through internal efficiencies, such as accelerated coding times and reduced costs, and has contributed to a 10% Y/Y increase in average revenue per user to $230. The company's financial position is solid, characterized by a capital-light model, a healthy 2.3x net debt to EBITDA ratio, and a shareholder-friendly capital allocation strategy focused on share buybacks. Despite a positive outlook, investors must consider risks including exposure to high-churn small businesses, intense competition limiting pricing power, and a near-term 50bp revenue headwind in Q4 2025. Furthermore, future earnings will be impacted by a normalization of the tax rate above 15% as one-time tax benefits are exhausted.

Key Decisions for Investors

• Given the significant valuation contraction to 19x NTM EBIT despite solid fundamentals, the current share price may represent an attractive entry point, as the analyst's model indicates a 23% discount to a fair value of $192 per share.
• The core investment thesis hinges on margin expansion, therefore investors should closely monitor the revenue mix shift towards the higher-margin Applications & Commerce segment and evidence of AI-driven operational efficiencies supporting the 33% EBITDA margin target for 2026.
• It is prudent to monitor key risks that could challenge the outlook, including any slowdown in the A&C segment's growth, signs of increasing churn in the core small business customer base, or intensified pricing pressure from competitors.
• Shareholders should factor in the normalization of the effective tax rate, which is expected to rise above 15% as temporary tax credits are utilized, as this will present a headwind to future net earnings and P/E multiples.