Economic uncertainty has crushed the market this year. With rising inflation around the world and a recession putting many business leaders on edge, few companies have been able to jump through every hoop 2022 has had in store. The tech sector has been hit especially hard, with the tech-heavy Nasdaq Composite index down 30% year to date.
Semrush (SEMR -2.92%) has had a similar story. Shares of the marketing technology company have plummeted 60% in 2022, but could the company fare better in 2023?
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No company is immune to macro challenges
Only a few tech companies have evaded the challenges brought on by 2022. With high inflation and a looming recession, many companies have tried to cut spending. This includes advertising, marketing, and how much they spend on software.
Semrush isn't immune to this either. While its offerings are still important to marketing teams' daily duties, the marketing technology platform has seen demand lag. The company's churn hasn't changed much compared to the second quarter, but in the third quarter, the company's net retention rate fell from 125% to 122% sequentially. In other words, customers might not be leaving the platform, but they are slowing the pace of how much they increase spending on Semrush.
That said, Semrush has remained more resilient than other tech stocks. Many companies have seen demand fall off a cliff, but Semrush is only going over a minor speed bump. In Q3, revenue increased at a healthy year-over-year rate of 34% to $66 million. The marketing technology company projects its full-year revenue to rise at a similar rate, growing 34% to 35% compared to 2021.
Semrush has also seen strength in demand among large customers. In Q3 2022, those spending over $10,000 annually shot 70% higher versus Q3 2021.
Semrush faced difficulties in Russia
Investors might have sold off shares after seeing the consequences of the challenging macro environment, but another potential culprit was the ordeal Semrush has had with Russia. In early 2022, when Russia invaded Ukraine, the company shut down its operations in the country and helped its Russian employees leave the country. Most businesses did this, but it was a much more costly matter for Semrush. As of the first quarter of 2022, roughly 64% of the company's employees worked in Russia. Getting them out of the country was difficult and expensive.
Semrush succeeded with this. By Q2, it had relocated all of its Russian employees to other countries in Europe and had no operations in Russia. However, this created some significant expenses that impacted the bottom line. The company expects these relocation expenses to cost $10.5 million in 2022, pushing its non-GAAP (adjusted) net loss guidance down to $25.5 million for the full year.
This anticipated net loss is far worse than the $3.3 million loss under generally accepted accounting principles (GAAP) it reported in 2021, and investors likely weren't pleased by this. However, this is a long-term investment in Semrush's people. Additionally, these are one-time costs, so the company's profitability will likely shoot higher in 2023.
2023 could be a brighter year
There's no doubt that 2022 could have been better for Semrush, but nothing screams that there are prominent warning flags for this company. The business continues to see healthy demand, even if it may be a slight decline from past quarters, and profitability could bounce back powerfully in 2023.
Because of the tough year, however, Semrush is trading at price-to-sales ratio of 4.6. This is not only the company's lowest valuation ever as a public company, but it's also below rivals in the space. This could be an attractive entry point for investors who have sat on the sidelines.
Therefore, now could be the right time to add this exciting stock into a diversified portfolio to hold for 2023 and beyond.
