Semrush’s stock price has taken a beating over the past six months, shedding 24.9% of its value and falling to $7.44 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Following the pullback, is now the time to buy SEMR? Find out in our full research report, it’s free.
Why Does Semrush Spark Debate?
Born from the need to make sense of the complex digital marketing landscape, Semrush (NYSE: SEMR) is a software-as-a-service platform that helps companies improve their online visibility, analyze digital marketing efforts, and optimize content across search engines and social media.
Two Positive Attributes:
1. Billings Surge, Boosting Cash On Hand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Semrush’s billings punched in at $110.7 million in Q2, and over the last four quarters, its year-on-year growth averaged 23%. This performance was impressive, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth. 
2. Elite Gross Margin Powers Best-In-Class Business Model
What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.
Semrush’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 81.4% gross margin over the last year. Said differently, roughly $81.43 was left to spend on selling, marketing, and R&D for every $100 in revenue. 
One Reason to be Careful:
Shrinking Operating Margin
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Analyzing the trend in its profitability, Semrush’s operating margin decreased by 3.3 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Semrush’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was breakeven.
Final Judgment
Semrush’s positive characteristics outweigh the negatives. With the recent decline, the stock trades at 2.3× forward price-to-sales (or $7.44 per share). Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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