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5 reasons to avoid the GoDaddy IPO

5 reasons to avoid the GoDaddy IPO

GoDaddy tried to go public in 2006, but failed as investors showed little interest in the money-losing Internet domain name registrar. One 2011 private-equity buyout later and GoDaddy is back, poised to make its public debut Wednesday, after reportedly pricing its initial public offering at a higher-than-expected $20 a share.

There's plenty to like about the company, with its strong customer growth and steady revenue increases. GoDaddy also has the leading position in its industry, with one out of every five domain registrations. The company reports almost 13 million customers, mainly small and medium-sized businesses, that pay annual subscription fees to register domain names and get other online services like web hosting.

While the domain name business appears saturated, with 280 million names already registered, GoDaddy is looking for a bump from a new wave of just-approved new domain suffixes like .nyc, .guru and .photography.

But investors should look a little more deeply before jumping in. Here are five risks to consider:

1. No profits

This was the knock on GoDaddy a decade ago after it filed to go public. And when the company cancelled its plans, here's what then-CEO Bob Parsons told employees:
"Slowly -- because of the maturing of our domain name portfolio, and the eventual slowing of our growth rate, due to the law of large numbers, and the increasing revenue generated by sales of additional products that generate immediate GAAP earnings, we will report accounting earnings -- under the accounting method that the AICPA insists we use."

Again, that was August, 2006. But the last three years have just shown more losses. GoDaddy lost $143 million last year on revenue of $1.4 billion, which followed a loss of $200 million on revenue of $1.1 billion in 2013. The company has highlighted its cash flow from operations, blaming the losses on accounting rules that require it to defer reporting some subscription revenue. That was the same explanation that didn't fly in 2006.

2. IPO proceeds go to repay debt and insiders

As often happens with private-equity-owned companies going public, not much of the proceeds of the IPO will go toward fueling future growth. Instead, $33 million goes to pay IPO expenses, $26 million is for the private equity sponsors, $3 million goes to Parsons directly and another $315 million will repay a 2011 loan that went to to Parsons. That's $377 million out of an estimated deal of under $500 million.

To be sure, while this game plan offends some investors, the historical track record of PE-backed IPOs isn't bad.

3. The sector isn't exactly hot

GoDaddy has a variety of competitors, including some that have very deep pockets -- for example, Google (GOOGL). But among other small, publicly-traded domain name registrars, recent results look weak. Shares of Web.com Group (WWWW) have lost 1% over the past three months while Wix.com's (WIX) stock is off 11% over the same period. Tucows (TCX) is also down lately, 2% over the past three months. Only Endurance International Group Holdings (EIGI) has gained, and it was up only 4%.

4. Heavy debt load

Even after the IPO, GoDaddy, which will trade under the ticker symbol GDDY, will be carrying a substantial debt burden of over $1 billion. That's going to suck up a lot of cash flow to cover interest payments and makes it harder for the company to navigate if the economy weakens. And the debt has to be paid off or refinanced in 2019 and 2021, creating a risk that lenders may not want to finance the company then and that interest rates could be much higher.

5. Those Superbowl ads

GoDaddy is no stranger to controversy. Its super sexist Super Bowl ads may be a thing of the past but this year's ad, about a puppy sold online with a GoDaddy web site, was so unpopular it was pulled before the big game. The company has sought to change its image, with elephant-hunting chairman and founder Parsons replaced last year. But as the puppy controversey showed, the image problem may run deeper than one man.