A Cybersecurity Stock That Isn’t Overpriced
Forensic Magnet (TSE: POWER) develops digital research software. Acquire, analyze, report, and manage evidence from digital sources such as computers, mobile devices, IoT devices, and cloud services.
Magnet Forensics is a very strong business that has the support of analysts. As a result, we are optimistic about the action.
Magnet Forensics operates in the cybersecurity industry, which was valued at $ 133 billion in 2021. Between 2022 and 2027, the industry is expected to see a compound annual growth rate of 14.1%.
More specifically, Magnet Forensics offers tools designed for digital research and intelligence. This niche under the umbrella of cybersecurity was valued at $ 6.3 billion in 2021 and is expected to grow at a compound annual growth rate of 10.1% from 2021 to 2026.
This shows that the industry is very healthy and growing at an impressive rate, which makes sense given the importance that technology has acquired in our daily lives. This dependence on technology will only continue to increase in the coming years, laying the groundwork for an increase in cybercrime.
In fact, the rate of cyberattacks has risen in recent years. In 2017, 77% of organizations were compromised by at least one successful cyberattack. In 2021, the rate rose to 86%.
Thus, no matter how important preventive measures may be, being able to determine “who” might be even more critical, given the impressive number of successful attacks. In addition, the company’s platform is not limited to cyberattacks. It can also be used to collect evidence of criminal activity from electronic devices much more efficiently.
Therefore, these factors provide strong headwinds for the company to see continued growth in the future. In fact, Magnet Forensics has driven revenue growth of 30% to 33% in 2022, which is very impressive considering that the company has a positive free cash flow.
Magnet has impeccable finances
When analyzing the company’s financial statements, what stands out is its gross margin. Magnet Forensics is able to consistently achieve margins in excess of 90%, which is not a common feat in the business world.
As a result, it is able to drive revenue growth of 30% while expecting EBITDA margins in the range of 14% to 16%. It also allows the company to reinvest a larger share of its revenue in research and development, which is the most crucial expense for technology companies.
If a technology company does not innovate, it will surely lag behind competitors who will make their products and services obsolete. Therefore, being able to significantly invest a larger share of your research and development revenue will help you stand out from your competitors.
In addition, Magnet’s balance sheet is solid. In fact, only the company’s cash position is almost twice as large as its total liabilities. As a result, there is currently very little financial risk.
When we value Magnet Forensics, we want to focus on its free cash flow, as it will give us a better picture of the company’s performance. Analysts estimate that Magnet is expected to reach a free cash flow of $ 19 million, approximately CAD 24.5 million at current exchange rates.
Following a recent sell-off that has brought the stock price below the $ 18 range, its EV / FCF metric is approximately 23.2 times. Given that the company is growing profitably at 30% more, it is probably one of the most reasonably priced cybersecurity actions and a high growth rate.
Are the numbers too good to be true?
One thing investors should always do is ask yourself if something is too good to be true. It is always possible for a company to be a profit manipulator.
To find out if this is the case, we will use a method known as Beneish M-Score, which can help us identify whether a company is a profit manipulator.
The interpretation is quite simple. If the M score is above -1.78, the company is likely to be a profit manipulator. Conversely, if the M score is less than -2, the firm is likely to be a profit manipulator. Finally, a score between -1.78 and -2 is a possible manipulator.
Although the interpretation is simple, the calculation is not and requires many steps. The formula for this method is as follows:
(+) 0.92 × DSRI
(+) 0.528 × BMI
(+) 0.404 × AQI
(+) 0.892 × SGI
(+) 0.115 × DEPI
(+) -0.172 × SGAI
(+) 4,679 × TATA
(+) -0.327 × LVGI
DSRI = Day-to-day accounts receivable index
DSRI = (Net receivable / Sales) / (Net receivable t-1 / Sales t-1)
BMI = Gross Margin Index
GMI = [(Sales t-1 – COGS t-1) / Sales t-1] / [(Sales t – COGS t) / Sales t]
AQI = Asset Quality Index
AQI = [(Total Assets – Current Assets t – PP&E t) / Total Assets t] / [(Total Assets – Current Assets t-1 – PP&E t-1) / Total Assets t-1]
SGI = Sales Growth Index
SGI = Sales t / Sales t-1
DEPI = Amortization rate
DEPI = (Amortization t-1 / (PP&E t-1 + Amortization t-1)) / (Amortization t / (PP&E t + Amortization t))
SGAI = General and administrative expenses index of sales
SGAI = (GVT Expenditure t / Sales t) / (GVA Expenditure t-1 / Sales t-1)
LVGI = Leverage Index
LVGI = [(Current Liabilities t + Total Long Term Debt t) / Total Assets t] / [(Current Liabilities t-1 + Total Long Term Debt t-1) / Total Assets t-1]
TATA = Total accrual on total assets
TATA = (Revenues from continuing operations t – Cash flows from operations t) / Total assets t
Now that we have defined the formula, we need to gather the data to enter it into the equations, which you will find in the following image:
Now that we have the necessary data, we can do the calculations we have summarized in the following image:
Therefore, Magnet Forensics is not a profit manipulator because it has an M score of -2.69.
The Wall Street Dam
As for Wall Street, Magnet Forensics has a Strong Buy consensus rating based on four assigned purchases in the last three months. Magnet Forensics’ average target price of $ 40.50 implies a 128% upside potential.
Magnet Forensics is a very strong business that is growing very fast and is still profitable. It has sound finances, a reasonable valuation and also has the support of analysts who think that stocks can more than double. As a result, we are optimistic about the action.
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