Post by
retiredcf on Feb 03, 2022 8:35am
CIBC Initiate Coverage
EQUITY RESEARCH
February 2, 2022 Initiating Coverage
MAGNET FORENSICS, INC.
Investigating A High Growth Market – Initiating At Outperformer
Our Conclusion
As of February 2, we are initiating coverage on Magnet Forensics, Inc. with an Outperformer rating and C$33 price target based on a 2023E EV/Sales multiple of 8.0x. Magnet is a leading provider of digital investigation tools for public safety and corporate clients. We see multiple avenues for potential future growth, including user and product extension within the existing customer base, continued expansion into the enterprise market, and M&A.
Key Points
Growth In Digital Evidence Driving Market Expansion: Magnet provides
public safety organizations with tools to recover, manage and analyze digital evidence. These organizations have seen a rapid rise in the amount of digital evidence, which is now present in 85% of all criminal investigations. Magnet uses a land-and-expand strategy within public sector organizations, with its +120% net revenue retention highlighting the stickiness of its solutions. Recent case analytics and intelligence offerings have broadened Magnet’s user base within public safety clients to non-technical users. Magnet’s annual recurring revenue per account has grown by 86% over the past two years as clients add users and additional functionality.
Private Sector A Relatively Untapped Opportunity: Magnet’s private
sector business has grown quickly as public sector users migrate to the
private sector and digital threats against corporations rise exponentially.
Magnet launched a dedicated private sector offering in 2020 and the private sector now comprises over 30% of sales. We see strong growth opportunities within the private sector for Magnet, with the average selling price of its corporate offering almost double that of its traditional public sector solution.
A Capital-efficient Growth Story: Magnet has been bootstrapped since
inception, with insiders owning ~75% of the business post-IPO. We do see
lack of liquidity as a potential concern for larger institutional fund managers. Magnet had a 49% CAGR in annual recurring revenue between 2018-2020, while maintaining market-leading gross margins (mid-90% range). Post-IPO, we expect Magnet to focus on executing on the growth opportunity, and forecast adjusted EBITDA margins in the mid-teens through 2023E.
M&A Is Upside: Pre-IPO, Magnet focused predominantly on organic growth. Post-IPO, the company has a new focus on M&A, acquiring DME Forensics in September 2021 for ~$9 million. We believe that Magnet is looking for tuck-in opportunities that fill out the product suite. The company had $110 million in net cash at the end of Q3 and we see the potential for
~$2/share-$11/share upside from capital deployment on M&A.
Valuation: Our C$33 price target values Magnet at 8.0x EV/2023E sales, in line with the peer average. We regard Magnet as attractive at these levels. The company scores well on a Rule-of-40 basis (68%), but trades well below similar-scoring peers. Our upside scenario of C$42.50 values the company in line with Rule-of-40 peers at 10x 2023E sales