Can Squarespace find its groove?

• Squarespace Inc (NYSE: SQSP) share price hits US$54.82 per share
• The share performance is a 25.6% improvement from its dismal debut
• The increased R&D spending could result in sluggish profits, an analyst says
• Buy and sell Squarespace stocks with an IG account

Squarespace stock price: What’s the latest?

Newly listed Squarespace, which helps businesses and individuals build and manage their websites, inched 0.2% lower to end Thursday at US$54.82, on a volume of nearly 200,000 shares.

On Monday (24 May 2021), the counter had surged by 9.6% day-on-day to finish at US$54.30. That is the first time it closed above the US$50 reference price assigned by the stock exchange.

The SQSP shares went on to advance another 0.4% on Tuesday and 0.8% on Wednesday.

Compared to its first-day closing price of US$43.65 per share, the stock has risen 25.6%, and is almost 10% higher than the reference price.

The SQSP stock made a lacklustre debut last Wednesday (19 May 2021) via a direct listing. As the website building and hosting company went ahead with its listing plans despite a broader market sell-off, its valuation sank by a third of what it was in March, Reuters reported.

Immediately after the listing, Squarespace founder and CEO, Anthony Casalena, maintained a 68% voting control due to a dual-class share structure, Bloomberg reported. At the time, he owned more than three-quarters of Class B stock, which carried 10 times the voting rights of Class A shares.

Why are some analysts unimpressed by Squarespace?

Besides its website-building services, Squarespace also sells e-commerce tools, including those that help users sell products online and manage relationships with customers through email campaigns.

The Covid-19 pandemic has given a boost to New York-based Squarespace, as a slew of small businesses rushed to build an online presence to reach their home-bound customers, Bloomberg noted.

Total revenue thus grew by 28% year-on-year to US$621 million in 2020. However, net income fell 47%, which the firm attributed to increased marketing costs.

As the website-development company aims to expand aggressively into new areas, this could again result in higher operating costs, which may lead to a lack of improvement in profits in the near term despite higher sales growth, said analyst Douglas Kim, who publishes on Smartkarma.

‘It appears the company is intent on further spending on R&D (research and development) and marketing to achieve scale, which could further negatively impact profit margins,’ Kim said.

He also noted that the website-hosting service’s competitors - including Wix.com, BigCommerce Holdings, Shopify and GoDaddy - generated an average sales growth of 40.6% year-on-year in 2020, higher than Squarespace’s sales growth of 28.1%.

Moving forward, a key investment concern would be Squarespace’s worsening operating margins, Kim opined.

A recent Forbes commentary noted that while Squarespace’s large total addressable market may entice growth investors, that does not necessarily translate into hefty profits, as the company needs to spend heavily to attract users given the ‘intense competition’ in the industry.

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