Semrush Is A Worthy Candidate For Your Watch List

Anyone who has tried to start an online business - or get online visibility for an "off-line" business - knows just how hard it can be to get noticed.

The internet is truly enormous, and standing out is difficult. But it is also a tremendous source of new customers. Over 5 BILLION people worldwide use it every day, with the average person spending 6 hours a day online! It cannot be ignored.

To get noticed, there are a few key avenues that businesses can pursue:

• Search keyword ads: Buying ads that show up on search engines, social media platforms, streaming video, or other online networks when a user searches for certain words or phrases.
• Social media following: Posting content to social media that draws followers and likes that can lead to viral distribution and more exposure for your business.
• Search engine optimization, or SEO: Fine-tuning the content you create to get ranked high in search engines like Google.
• Content marketing: Creating written or video content that is of use to potential customers.

The Green Screen stock we're looking at today helps businesses manage all of these visibility sources - and more! The company is Semrush (SEMR). Let's take a look!

What Semrush Does

Semrush is a cloud-based, software-as-a-service (SaaS) application suite that helps businesses manage their online visibility and marketing efforts.

Semrush can help you identify what keywords you should target for ad buys by identifying the most frequently searched for terms, potential terms that are underbid, terms your primary competitors are targeting, etc.

It can analyze a blog post you are planning to put up and (using AI tools) suggest ways to make it more search engine friendly, such as adding certain keywords to the URL, re-structuring the document to emphasize key parts, and so forth.

The software has modules that aggregate your entire social media presence, allowing you to see at a glance your followers and activity across multiple platforms. It also lets you post content simultaneously across them, and identify the reaction. Considering the proliferation of social media platforms out there, that is a huge time saver!

This is just a sampling of the value Semrush provides to clients, but there's a lot more it offers (see more on their features page). The software integrates into all kinds of tools and platforms including Youtube, Facebook, X, Google Analytics, Trello, Wordpress, and many more.

Semrush has a large and growing customer base, with over 1 million free users and 100k paid users, including some big names like Disney, Facebook, eBay, and Salesforce.com. The firm's addressable client base is basically everyone from small-to-medium businesses (SMBs) to enterprise firms, in nearly every industry.

Is Revenue Growing - and Recurring?

Semrush's platform is subscription-based, with several tiers (including a free one) of subscription plans, offering incremental features and numbers of users. Users pay on a monthly basis until canceled. This is a classic recurring revenue model, so it easily passes that test.

Growth has been very good at a 3-year compound growth rate of over 30%. This year, the firm is reporting growth in the low-20% vicinity, with similar growth rates in number of paying customers. Free customers are still growing 30% year-over-year.

Management estimates the current market opportunity at $16 billion, with adjacent markets adding another $4 billion of opportunity in the longer term. This makes sense, as online visibility and marketing tools are applicable to virtually any business, regardless of size or scope. With 1 million free users, Semrush has a targeted marketing base to convert.

I've always said that enterprise-level customers are the gold standard in SaaS, as they are far stickier and more likely to expand spend within your platform. Semrush doesn't break out this cohort, but they did reveal that customers at over $10k annual spend are growing 30% a year. The firm rolled out its Enterprise Platform in June, a big step towards further capturing this lucrative market.

Finally, new capabilities are a key driver for sales expansion. AI tools have been the focus here, including an AI chat prompt, an AI-driven ad copy generator, an accessibility analyzer, and more. New features provide the potential for up-selling clients to higher pricing tiers.

In all, I think high teens to low 20's growth rates are a reasonable expectation over the next 5 years. Semrush passes the revenue tests.

Is There A Moat?

The root of any moat is the same as for any business-to-business SaaS operation: switching costs.

Once a company has adopted Semrush to help manage its online visibility presence, it becomes a key tool in a critical business function (marketing). Any switch leads to not only financial but also business disruption costs. It takes a lot of time and effort to re-train employees, install and configure the replacement, and re-create all of the integrations.

Switching costs are illustrated in Semrush's net revenue retention rate of 107%. This shows that the firm is not losing many customers, and expanding spend with them annually (on net).

When it comes to winning new business, Semrush has some advantages here as well. There are plenty of competitors in each focus area. For example, Conductor and SimilarWeb compete in SEO tools, while in social media management HootSuite and Sprout Social have strong presences. But there is no direct competitor for the comprehensive platform that Semrush offers. The competition is fragmented, and customers increasingly want more integration.

Semrush is considered the "gold standard" in its industry. It is listed as a "Best Global Software Company" in G2's rankings, and a "Leader" in all of the visibility areas it services. With these credentials, it is going to be a part of any company's evaluation of visibility tools.

I would classify any moat here as "narrow". Semrush's client base still skews largely SMB at this point, and SMBs go out of business, are acquired, and can switch software vendors much easier than enterprise clients.

Management and Finances

Semrush's CEO is Oleg Shchegoley, who founded the firm in his late 20's (he is 43 today). The other co-founder, Dmitry Melnikov (age 44), was COO up until 2022 and today still serves as a board member.

Together these two men are highly invested in Semrush's performance, with Shchegoley owning 32% of the publicly traded shares (worth close to $650 million) and Melnikov owning 16% (a cool $330 million). Between them, they also control over 90% of the super-voting class B shares. That puts them in firm control of the boardroom, with 77% of total voting power.

I'm happy with them in control, as Semrush's financial performance to date has been excellent. The firm's growth has largely been organic, with just a few smaller, strategic acquisitions, and a debt-free balance sheet. Free cash flow generation has been spotty, as is often the case with early-stage software firms, but has turned solidly positive in 2024 at a margin of about 11%.

Risks

As SaaS goes, Semrush would fall into the "medium-high" risk category.

Competition is a concern here. There are a LOT of visibility tools out there, and while they can be very fragmented, many of them are low or no cost. For example, you can manage your keyword marketing using free platforms through Google or Facebook, track your social media presence through the individual network tools, etc. Barriers to entry are pretty low, and it wouldn't surprise me to see more direct competitors to Semrush, if the market shows itself to be a lucrative one.

One big problem with the sentiment around this stock is the perception of it as a "Russian company". There was some truth to this. Prior to 2022, the bulk of the company's software development was based in Russia. A look at the Executive Management page shows a lot of Russian-sounding names. Competitors like aHrefs have used this as a counter-marketing tool.

The fact is that Semrush moved all operations out of Russia almost immediately after the Ukraine invasion of 2022. Today it has no presence in the country. To me, this settles the question. There may be perception of it as Russian-controlled, but there is no evidence of such. The executive team is based in Boston. As the perception fades, I believe the stock's valuation multiple can improve.

Conclusion

Semrush meets most of our criteria for a "green dot" stock. It clearly has a recurring revenue model and much higher-than-average revenue growth rates. There are switching costs involved for existing customers. It is founder-led by relatively young, highly invested people. It addresses a real business challenge that will likely only get larger and more important moving forward.

Using an 18% 5-year compound annual growth rate, a 23% free cash flow margin expectation, reasonably high share dilution expectations (this IS a small-ish software company), and much higher than usual 12% discount rate to account for the unknowns, I get a fair value of $15 for SEMR. The stock currently trades just under that, making it a decent buy but not quite enough for our Buy List. We will park it on the Watch List and look for a better entry point.