Similarweb Overview

Similarweb is one of Israel's most interesting tech companies that doesn’t get enough attention. After years of what seemed like business stagnation, the stock has surged over 100% since its August low. Why? And why is it interesting to ANEK?

Similarweb is a leading player in the field of digital activity analysis and research. It provides technological services that help companies, particularly B2C businesses, gather data from across the internet and understand their competitive position.

One of the company’s key strengths is its ability to offer a comprehensive suite of services addressing all of a client's digital needs. This starts with website traffic analysis, including identifying key traffic sources like organic search and social media, and extends to engagement metrics such as time spent on site and bounce rates.

Competitive Insights and Features

Similarweb also offers in-depth competitor analysis, enabling comparisons across different sites and early trend detection (hedge funds and short-sellers also use its data to identify trends). Their services include SEO optimization and detailed reporting with tools that help uncover search trends, consumer preferences, and more. By integrating multiple functions into a single platform, the company reduces the need for multiple suppliers and simplifies operations for its clients.

Challenges and Client Feedback

Like any tech company, Similarweb faces challenges. Some clients have noted geographical data gaps and occasional inaccuracies, particularly when comparing websites or measuring popular search metrics (though its accuracy surpasses competitors). Despite this, most customers highlight a high ROI from Similarweb’s services, often recouping their investment within one to two months if the tools are optimally utilized.

However, a critical question arises: how Critical is Similarweb to its clients?

The concern is whether the service is "nice to have" rather than essential. In tougher economic times, clients are likely to prioritize essential services like CRM or employee management tools over platforms like Similarweb. While clients can manage without it by working with multiple providers, this compromises service quality and competitive insights.

Pricing Power and Strategic Position

The data Similarweb collects is crucial for some clients but less so for others, raising questions about its pricing power. Critical services often allow companies to raise prices with minimal churn, as seen with CoStar—a company ANEK tracks. CoStar's legacy service is so vital to clients that they are willing to pay its high and rising costs because they cannot function competitively without it.

Similarly, Similarweb’s management argues that its services are underpriced, with some clients willing to pay significantly more. Our research confirmed that Similarweb has created a notable gap versus competitors, making it akin to a “brand name” for data aggregation.

Growth and Financial Momentum

Recent quarters have validated these insights with strong performance, particularly amid a challenging software (B2B) sales environment. Revenue growth accelerated from 13% to 18%, while the Net Revenue Retention (NRR) for large customers exceeded 110%. This growth stems from a 20%+ increase in new customers, particularly larger clients, who typically sign bigger contracts but require longer sales cycles.

Large accounts, which grew by 25% in ARR, now constitute 60% of total revenue. Additionally, the shift toward long-term contracts (now 45% of ARR) enhances cash flow stability. The company’s RPO (backlog of signed but unrecognized contracts) also grew from 24% to 27% in Q3, signaling potential future revenue acceleration.

Despite the 100% stock rally since August, the company remains reasonably valued. Analysts project 14% revenue growth for next year, though the company already accelerated to 18%, with RPO growth providing further tailwinds. Similarweb is now can be evaluated based on free cash flow, and if it maintains high-teens growth and improves margins toward 20% (approaching the Rule of 40), its multiples could become even more attractive than the projected 25' 16X FCF.

What Sets Similarweb Apart?

The company’s limited stock dilution is another advantage, especially compared to other tech firms. Discussions with the leadership team revealed qualities ANEK values: a driven founder, product obsession, investor integrity, and strong management dynamics.

Our Thesis

We view Similarweb as a market leader with a strong brand, a significant portion of its customers considering it critical, and a widening moat in an increasingly complex data landscape. The company benefits from a driven founder and a management team that has been executing effectively. Its competition is largely irrelevant in most cases, and there remains substantial greenfield opportunity for growth, given the vast potential TAM.

While it is not a perfect company nor does it have an unassailable moat, we saw it trading at a depressed price, with the potential to accelerate growth toward the high teens, along with significant expansion in FCF margins.

Risks to Consider

Investors should account for risks, including potential sell-offs by significant shareholders like Viola Ventures, Prosus Ventures, and Ion (as of July 2024). Such an event occurred in September when a large shareholder conducted a secondary sale, causing the share price to drop by around 15%, which presented a great opportunity to buy at a depressed price. Additional risks include regulatory challenges related to data privacy and disruptions in accessing data from major websites.

While AI may provide tailwinds, it could also enable competitors to close gaps or disrupt the industry entirely through advanced tools like AGI. Furthermore, the company’s small size and low liquidity make it inherently volatile.

We strive to learn from examples like ZoomInfo, which positioned itself as critical to its customers but ultimately proved otherwise. Similarweb is a fascinating company with a moat that continues to strengthen. We will continue to monitor and question where we might be wrong.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Our hedge fund may hold positions in the companies discussed and may actively trade in these securities. Our views are based on publicly available information and our internal analysis, which are subject to change without notice. We encourage readers to perform their own research or consult with a professional financial advisor before making any investment decisions. We assume no responsibility or liability for any errors or omissions in the content.

.