Table of Contents

• Introduction
• Semrush Holdings Inc (NYSE: SEMR)
• A Deeper Dive Into Semrush Holdings Inc's Financials
• Semrush Revenue Breakdown by Geographical Region
• Sales and Marketing Expenses
• Operating Margins
• Semrush Options Outstanding, Average Strike Price, and Standard Deviation
• Final Considerations Before Valuation
• Discounted Cash Flow DCF Valuation of Semrush Inc.
• Conclusion

Introduction

In this article, we value Semrush Holdings INC., a market leader in search-visibility which provides search-engine-optimization, digital marketing, and competitive analysis tools to help businesses get ahead of their competitors. More than 10 million marketers have tried Semrush whose client include small mom-and-pop shops to big corporations like Uber, ServiceNow, and Progressive. Even with a diverse user base with more than 90,000 paying customers, none of Semrush's customers account for more than 1% of their total revenue. We dive deep into Semrush's financial reports and S-1 filing to better understand the company and provide a compelling and in-depth valuation. The article comes with a Semrush DCF Valuation spreadsheet which provides the nitty-gritty of the Semrush Valuation.

Note to readers and investors: This is NOT an investment advice. Stock investments are subject to market risks. Please consult your financial advisor before making any investment decisions.

Semrush Holdings Inc (NYSE: SEMR)

The Semrush Holdings S-1 prospectus filing describes the company as "a leading online visibility management SaaS platform that enables businesses globally to identify and reach the right audience for their content in the right context and through the right channels." Semrush is a platform where you can analyze competitors, experiment with keywords to get better search visibility, and get ahead of your competition. Semrush is "a one-stop-shop for all of the competitive insights you need to build an unbeatable marketing strategy."

The Smileworks testament published by Semrush in their S-1 filing helps better understand what Semrush does and why customers are willing to pay the hundreds of dollars Semrush charges monthly for the base-layer of premium users.

A Deeper Dive Into Semrush Holdings Inc's Financials

Semrush Key Revenue and User Growth Highlights

Semrush has 95,000 paying members with per customer ARR spend of $2,868 in 2022, an impressive growth from 67,000 customers at an ARR of $2,123 in 2020 when the company went public. An impressive growth rate of 42% more customers with per customer spend increasing by 35%. These numbers translated to phenomal revenue growth as Semrush more than doubled their annual revenue from 2020 to 2022. Semrush also boasts more than 800,000 active free users, a highly lucrative user base that could be potentially converted to paying users.

Semrush has had a phenomenal growth since it's start. Digging on the IPO filings, we find impressive milestones. The company, founded in 2008 garnered 1000 paying customers by 2010 which it grew 50-fold, generating $100 million in Annual Recurring Revenue by 2019. Semrush is a globally-recognized brand that I knew of as an aspiring young blogger back in 2014 when I was barely out of middle school.

Valuation Input: We provide a 35% revenue growth rate for the next year and maintain compounded revenue growth rate of 30% for years 2-5 before slowly bringing the growth rate down to risk-free rate for terminal years.

Semrush Revenue Breakdown by Geographical Region

As much as we'd like to see Semrush's revenue breakdown by each and every country they operate in, which is a lot (157 countries), Semrush only provides revenue breakdown by three regions: US, UK, and Rest of the World. Majority of Semrush's billings are in the US Dollars. According to Semrush's 2022 10-K filing, the US, UK, and the Rest of the World accounted for 47%, 10%, and 43% of revenue respectively. Refer to the picture below for breakdown of revenue segment since the company went public in 2020 and has a boatload of cash on par with revenue.

Semrush is a wonderful growth story, having doubled their revenue in two years since going public. Furthermore, firm's management prides themselves for efficient capital management, having raised only $37 million in capital to reach ARR exceeding $100 million before going public.

Valuation Input: Crunching numbers yielded a significant negative Sales:Capital ratio for Semrush. So, we extrapolated management's prudent capital management into our valuation framework, which gives Semrush a Sales: Capital ratio of 2.5 for years 6-10 into our valuation. Current Sales: Capital for years 1-5 will be kept at 1 as the company recently went public.

Note to readers: This is NOT an investment advice.

Sales and Marketing Expenses

An internet company with a massively successful product, Semrush's sales and marketing spend is nearly half of their total revenue. Do we interpret such a sizable marketing spend as driving impressive revenue growth or do intepret it otherwise? Let's go far back to 2019 and see the trend of marketing spend compared to revenue to get a clearer picture.

An impressive growth company with a voracious apetite for marketing spend, Semrush spend on sales and marketing is justified. The following excerpt from the company's S-1 filing gives a clearer pictures as to why it's a good idea for Semrush to spend such heavily on sales and marketing.

Based on a survey by McKinsey & Company, globally, the percentage of consumer interactions that are digital increased to 58% in July 2020, up from 36% in December 2019... The awareness stage is the most critical part of the digital marketing process, as it introduces a company’s brand to consumers and educates them on its differentiation and value proposition. An initial positive company-consumer interaction improves the efficacy of the digital marketing process. Efficient consumer acquisition enables companies to scale and drive long-term return on investment (“ROI”) on their sales and marketing spend.

The keywords here are 58%, digital marketing, and long-term return on investment on sales and marketing spend. Semrush has been able to achieve phenomenal growth not only due to their unique value-enhancing product - having a phenomenal product is a given for a company to survive a competitive market - but also because they're able to reach a wider audience due to their aggressive spend on sales and marketing. For Semrush, these marketing dollars are like Capital Expenditurres that will drive their operating margins and income higher in the future.

Speaking of operating margins, let's look at how the company's operations are faring. Fair warning: its ugly, so far.

Operating Margins

Semrush has continually had negative operating margins, regardless of how far back in the past we go. It's a challenge to value a company that has negative operating margins. The company is practically burning everything, even more than what it's generating. How is it even staying alive?

While the task is daunting, we should not let a great company slip by just because they have negative earnings. We shall make some compromises, consolations, and future projections capitalizing on current trends. Let's explore them in finer details:

1. The Compromise we make is with ourself. As Semrush is a phenomenally growing company with great growth propsects, evident with past growth rates of 50X within the first 10 years, and then further doubling in the next 2 years, we make a reasonable estimate that the company will keep up the pace of growth and achieve significant economies of scale. This economies of scale will bring significant earnings even as the company keeps aggressively spending on sales and marketing.
2. The Consolation we give ourself to symphatize with Semrush's negative operating earnings is that Semrush is a internet technology company which has much of their free-fash flow coming into the future. And these cash flows are going to be significant which will make up for any and all operating losses which will be carried forward anyways.
3. Future Projections Capitalizing Current Trends gives us a reasonable confidence to estimate Semrush's long-term Operating Margins at 25%. The company's sales and marketing dollars are akin to CAPEX which will drive higher revenues with time. Given the aggressiveness in Sales & Marketing, we estimate it will take Semrush 6 years to reach a 20% Operating Margin.

Valuation Input: We give Semrush 1-year operating margin of 0% assuming the company will have barely any operating income, and long-term operating margin of 25%, and give the company 6 years to reach the long-term Operating Margin target.

Semrush Options Outstanding, Average Strike Price, and Standard Deviation

The company has a sizable stock options program, which, according to their recent 10-K is at 2.04 million units of stock at average strike price of $2.32. Semrush's annual report provides data on the standard deviation of stock price at 53%. We simply input these data in our valuation template which is the creation of Dr. Aswath Damodaran of NYU. We highly recommend everyone to read Dr. Damodaran's blog and see his lectures freely published on Youtube.

Valuation Input: Options Outstanding of 2.04 million Average Strike Price of $2.32 and Standard Deviation of 53%.

Final Considerations Before Valuation

1. While Semrush is a great company, there surely is some probability of failure with any company. We assume a 10% change of probability of failure for Semrush. 10% is a low number, however, Semrush has been around for more than 15 years and has been tremendously successful. In case of failure, we give the distress proceeds to 50% of estimated fair value of the company. The probability of failure is set in the situation where the co-founders Oleg Shchegolev and Dmitry Melnikov leave the company unexpectedly. These folks practically built the company and thus have very high Key Person value at Semrush. Read this article to learn more about Key Person Value
2. We assume Semrush's long-term cost of capital to be similar to any other mature company at risk-free rate +4.5% .
3. We assume Semrush's long-term return on capital to be equal to the cost of capital under the rationale that any competitive advantage today will fade away in the future.
4. We assume Semrush's investments take no more than 1 year to transform to growth in revenues.
5. Semrush's effective tax rate will be the Marginal Tax Rate in the future.
6. Semrush's rate of growth into perpetuity will equal the risk-free rate. No company could possibly outgrow the economy in perpetuity.

Discounted Cash Flow DCF Valuation of Semrush Inc.

With the required factual data and estimates in place, it's time to plug these numbers in our valuation worksheet. Plugging in the numbers, we get a DCF value of Semrush Holdings Inc. (NYSE: SEMR) under the given conditions at $52.06 per share. The current price of Semrush as of writing this article is $14.12 . Our valuation currently implies a massive disocunt for Semrush .

Download the Semrush Valuation Spreadhseet Template here

Conclusion

To wrap up, the intrinsic valuation of Semrush Inc paints a compelling picture of a company with remarkable growth potential and a unique market position in the domain of operation. Despite its current negative operating margins, Semrush's aggressive approach to sales and marketing, coupled with its history of exponential growth, suggests a trajectory toward sustained profitability. The discounted cash flow (DCF) valuation, with conservative assumptions and considerations for potential failure scenarios, indicates a significant undervaluation of Semrush Inc's stock at the current market price of $14.12. At $52.06 per share, our valuation implies a substantial discount, reinforcing the notion that Semrush presents an attractive investment opportunity. Investors may find Semrush Inc to be a compelling prospect for growth, recognizing the unique market advantages and strategic positioning that have fueled its impressive journey thus far.

Note to readers: This is NOT an investment advice. Stocks are subject to market risks. Consult a financial advisor for appropriate investment decisions.