Semrush has been on fire lately. In the past six months alone, the company’s stock price has rocketed 62.6%, reaching $11.95 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Semrush, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Semrush Not Exciting?

We’re happy investors have made money, but we're swiping left on Semrush for now. Here are three reasons why SEMR doesn't excite us and a stock we'd rather own.

1. Customer Churn Hurts Long-Term Outlook

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Semrush’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 106% in Q3. This means Semrush would’ve grown its revenue by 5.5% even if it didn’t win any new customers over the last 12 months.

Semrush has a decent net retention rate, showing us that its customers not only tend to stick around but also get increasing value from its software over time.

2. Shrinking Operating Margin

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales 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.

Looking at the trend in its profitability, Semrush’s operating margin decreased by 4.3 percentage points over the last two years. 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 negative 1.7%.

3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Semrush has shown weak cash profitability relative to peers over the last year, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 9.7%, below what we’d expect for a software business.

Final Judgment

Semrush’s business quality ultimately falls short of our standards. After the recent rally, the stock trades at 3.6× forward price-to-sales (or $11.95 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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