Back in May, we rated Canadian cybersecurity stock Magnet Forensics (TSE:MAGT) as bullish. The stock was trading at around C$18 then, but a recent shift in momentum has brought the stock over the C$40 mark. Now, MAGT stock is up about 180% from its low, making us shift our rating to neutral due to valuation concerns. Please note that all figures in this article are stated in U.S. dollars unless otherwise stated.
Magnet Forensics has several things going for it, such as an expanding total addressable market. As mentioned in our previous article, “Magnet Forensics offers tools designed for digital investigations and intelligence. This niche within the cybersecurity umbrella 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.” Other sources note that the digital forensics market is expected to grow by an 11.4% CAGR from 2022 to 2030 – even more impressive. This would make the market worth $22.3 billion by 2030, and it’s certainly possible for the company to expand into different cybersecurity areas.
Magnet Forensic’s Solid Financials
The first thing one might notice when analyzing Magnet is its strong balance sheet, featuring $122.3 million in cash & equivalents compared to just $1.4 million in debt. This is a considerable amount of cash for a company with a $1.32 billion market cap (in U.S. dollars) and a trailing-12-months (TTM) revenue figure of $89.3 million.
Also, the company consistently generates positive free cash flow (FCF) – $15.3 million on a TTM basis – that has been growing over the years and is expected to keep growing. Its revenue grew by 41% in its most recent quarter and is forecast to grow by another ~30% in 2023. Therefore, there seems to be nothing wrong with the company financially, but let’s take a look at its valuation.
Magnet’s Valuation is Not Enticing
However, this has pushed its stock into overvalued territory, arguably. It currently has a 13.9x price/sales multiple, which isn’t overly excessive considering its 92.9% gross profit margin and high growth rate, but it’s not cheap either. Looking out to 2023, analysts expect the company to generate free cash flow of $21 million. The following year, analysts forecast FCF of about $33.5 million. Based on its $1.2 billion enterprise value — calculated as market cap minus net cash — the company trades at forward EV/FCF multiples of 57x and 35.8x for 2023 and 2024, respectively.
High multiples are expected for high-growth companies with high amounts of recurring revenue, but paying too much can limit your future returns. Magnet Forensics’ valuation went from cheap in May to fair, at best, or even overvalued if you’re conservative. Let’s not forget – we’re in a rising-rate environment where valuations are important.
Is Magnet Forensics Stock a Buy, According to Analysts?
According to analysts, Magnet Forensics has a Strong Buy consensus rating based on three Buys assigned in the past three months. However, despite the Buy ratings, the average Magnet Forensics price target of C$38.67 implies 6.95% downside potential. Therefore, it’s possible that the stock has gotten ahead of itself here.
Conclusion: A High-Quality Company at a High Price
Magnet Forensics has very solid financials. However, due to its recent rally, Magnet Forensics now trades at an unappealing valuation, in our opinion. It’s also overextended from a technical standpoint, as it’s on track to have a fifth straight green week. Stocks that go up quickly also run the risk of coming down quickly. Therefore, it’s wise to wait for a pullback before considering a position.
