Eight Capital launched coverage on Thursday of Canadian cybersecurity company Magnet Forensics (Magnet Forensics Stock Quote, Charts, News, Analysts, Financials TSX:MAGT), with analyst Christian Sgro starting off Magnet with a “Buy” rating and C$35.00 target price. Sgro said sector tailwinds should help the company build its position as a market leader in the niche territory of digital forensics.
Waterloo, Ontario’s Magnet Forensics works in the sphere of cybersecurity which investigates and uncovers electronic data to find evidence of cybercrime and prevent future breaches by outlining the scope of attacks.
Founded in 2010, Magnet’s digital investigation software platform is geared at both the public and private sectors and has over 4,000 customers across 100 countries worldwide. The company saw revenue climb 37 per cent year-over-year to $70.3 million for its 2021 year, with adjusted EBITDA of $18.6 million, up 21 per cent. (All figures are in US dollars expect where noted otherwise.)
Magnet, which closed a $115-million initial public offering at C$17 per share in May, 2021, saw its shares shoot up to around C$60 by the end of August last year. But it’s been a long way down from there, with MAGT bottoming out this past June at around C$16 before rebounding somewhat to now around the C$21-22 range.
But Sgro sees plenty of upside from here, with his C$35.00 target representing a one-year projected return at press time of 63 per cent.
“Magnet provides a comprehensive digital investigation software platform to the public (defence and law enforcement) and private sectors. We see current tailwinds such as increased cybercrime and regulatory changes as driving cybersecurity spend globally. We see these trends trickling down to digital forensics investment, with Magnet benefitting as a market leader globally,” Sgro said.
Sgro pointed to a Gartner report which said the global cybersecurity market is expected to grow at an 11 per cent CAGR to 2026 from $172 billion currently. He said cybersecurity, frequency of breaches and the need for effective response software are moving up Boards’ agendas. Meanwhile, regulatory bodies are putting up more stronger reporting requirements on cybersecurity for public and private entities.
For Magnet and its focus on digital forensics as a component of incidence response, Sgro said the field was once concerned most often with the single device (a laptop) or a handful of smartphones involved in an incident, but the evolution of technology through the proliferation of wireless devices, IoT and cloud-generated data seta have all spurred development in digital forensics.
“We see Magnet’s artifact-first approach, focus on product, and brand reputation as key differentiators compared to peers. The Digital Forensics Incident Response (DFIR) landscape generally requires organizations to subscribe to multiple point-solutions for devices or workflows,” he wrote.
“Magnet’s ability to have one view of all evidence is an advantage, according to our research. Magnet works effectively across computer, mobile, and cloud endpoints, saving customers time on extraction and cohesive analysis. We think the workflow and case management tools create a stickier value proposition,” he said.
As far as competition in the space goes, Sgro said Israeli-based Cellebrite is Magnet’s largest direct competitor and the analyst says Cellebrite’s penetration across the public space is deep with over 6,700 public safety agencies and enterprises in over 140 countries, including over 2,700 North American state and local departments. On the private end, Sgro said the digital forensics landscape is more fragmented, with Canadian software conglomerate OpenText standing a a key competitor with its Encase product.
But Sgro likes Magnet’s niche product and attractive business model, which features strong recurring software revenue as well as modest contributions from product-focused M&A. Sgro noted that Magnet sees its total addressable market as a $6-billion opportunity and growing at a ten per cent CAGR.
“According to our conversations with customers and competitors, Magnet is differentiated with its product innovation, customer-centric culture, and brand reputation. We see an opportunity for continued rapid expansion by cross-selling to the public sector and moving up-stream in the private market,” Sgro wrote.
“Magnet works effectively across computer, mobile, and cloud endpoints, saving customers time on extraction and cohesive analysis. We think the workflow and case management tools create a stickier value proposition,” he said.
By the numbers, Sgro is calling for MAGT to generate full 2022 revenue and adjusted EBITDA of $93.2 million and $14.2 million, respectively, and 2023 revenue and EBITDA of $118.0 million and $20.4 million, respectively. On valuation, he estimates the company’s EV/Revenue as going from 8.0x in 2021 to 6.0x in 2022 to 4.7x in 2023 and its EV/adjusted EBITDA going from 30.0x in 2021 to 39.5x in 2022 and to 27.4x in 2023.
“Magnet currently trades at 4.7x 2023E EV/revenue compared to Canadian software peers at 4.9x and a broader group of software and cybersecurity peers at 4.9x. We believe the company’s valuation will potentially re-rate higher and likely persist at a premium benefitting from cybersecurity scarcity value in Canada,” Sgro wrote.
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