Today, I want to talk about a company that is at the intersection of several large and growing sectors – remote working, cloud computing, cybersecurity, and enterprise software. On top of that, the company’s product targets a massive userbase – businesses that use email.
This hidden gem is Mimecast (MIME). The company provides cloud security and risk management for corporate information and email. Cybersecurity threats are always getting more sophisticated. The cost of disruption is also rising, so it’s not surprising that cybersecurity spending is projected to increase at a 10% CAGR for the next decade.
And, email is one of the biggest points of vulnerability for companies. MIME has room to grow given that its total addressable market is estimated to be 1 billion. Currently, it has 15 million users. Some other things to like are its double-digit growth rates, juicy, expanding margins, above 100% retention rate, and attractive valuation.
Read more to learn more about MIME.
MIME’s recent earnings report and guidance showed that growth is strong for the company. The stock dipped along with many other companies that benefited from increased spending on digital services during the coronavirus. However, its recent earnings report confirms that the stock is still on its growth trajectory.
The company continued an impressive streak by posting its seventh straight beat of analyst expectations. Equally impressive is that it’s not topping expectations barely, it’s crushing them.
In its last quarter, it beat earnings expectations by 37% which was 137% higher than last year. Revenue also topped the consensus by 17%. The company is forecasting $563 million in revenue for the upcoming fiscal year. This was especially important as it indicated that its growth rate remains intact.
Given management’s track record of beating expectations by more than 10%, it wouldn’t be surprising to see revenue above $600 million. Wall Street analysts are furiously hiking earnings estimates. Over the last couple of months, 2021 estimates were increased by 30%, while 2022 was revised by 15% higher.
It also has plans to grow in multiple ways. Beyond email security, it provides adjacent products and services such as risk assessment tools, information archiving, secure messaging, file transfer, and web security. The average customer uses an average of 3.5 products.
In addition to this horizontal growth, it’s looking to enter new markets like government security as it’s recently obtained the FedRAMP certification. It’s also expanding internationally.
While its participation in fast-growing industries and double-digit revenue growth is attractive, more impressive is its low valuation relative to its peers. Its competitors include Qualys (QLYS), Proofpoint (PFPT), and Varonis (VRNS). These companies’ respective price to sales (PS) are 11, 7.5, and 24.
In contrast, MIME has a PS of 6 and a faster growth rate than any stock except for VRNS which has a highly inflated multiple. It also has $270 million in cash which is notable considering its $2.9 billion market cap. This also indicates the company is cash-flow positive unlike most of its peers.
Wall Street analysts are also in agreement as they have an average price target of $56.30 which indicates 23% upside. In addition, two 5 star analysts – Alex Henderson of Needham and Nehal Choksi of Northland Securities – have even higher price targets of $65 and $70, respectively.
Given this attractive growth and value picture, it’s not surprising that MIME is rated an A by the POWR Ratings which equates to a strong buy. This grade is calculated by weighting 118 different factors.
Over the last 20 years, A-rated stocks have generated a compound annual return of 30.7%. So, it makes sense that only an elite group of stocks quality for this grade. The POWR Ratings also assess stocks according to different components and industry conditions.
MIME has a Value grade of B which is consistent with its attractive valuation relative to peers. In recent months, the stock experienced selling pressure along with many stocks in sectors that benefitted from the coronavirus. Therefore, this is certainly an attractive entry point, given that its recent earnings report proved that it won’t be affected by the world returning to normal.
In terms of Quality, it is an A. We have tangible evidence of this with its 104% customer retention rate. MIME has a churn rate of about 15% but this is mitigated by users increasing their spending. It should also add more users given that its core demographic is small businesses.
What it comes down to is that this is a very attractively priced stock in a fast-growing industry. MIME’s recent earnings dispel any concerns of momentum slowing with the economy slowing.
Management also has a consistent track record of beating earnings and raising guidance. Another indication of a high-quality management team is that margins are expanding.
For these reasons, I believe that investors should take advantage of the stock’s recent correction.
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MIME shares were trading at $44.53 per share on Monday afternoon, down $1.39 (-3.03%). Year-to-date, MIME has declined -21.66%, versus a 3.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More…
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