Why Mimecast Shares Will Break Out

When Mimecast (MIME) posted strong first-quarter earnings, the company reaffirmed its business strength. Shares are trading in a tight range of between $43 – $50 as investors exercise caution over its valuations. With shares up over 90% above lows, investors starting a position in this internet security threats provider may want to wait first for a dip. But if stocks in this space are already up by more, it might take another correction in technology stocks, first.

With Mimecast trading near $50, what will it take for the stock to break-out?

Strong Outlook

In the first quarter, Mimecast posted total revenue growing 16% to $115.2 million. The email and data security company achieved a 106% revenue retention rate. Helped by Covid-19 forcing staff to work at home, Mimecast offered a high-demand product in email security. CEO Peter Bauer said,

Mimecast Email Security 3.0 restores trust in email and enables business to safely rely on this core system while staying connected to customers and employees.

Mimecast forecast adjusted EBITDA almost doubling from FY19 levels to $98 million:

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Source: Mimecast

Annual revenue will each close to $500 million by the end of FY 2021:

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The company owes its resilient cyber offering to its recent acquisition. It highlighted MessageControl as harnessing artificial intelligence to stop social engineering and human identity attacks. In the last quarter, Mimecast added a U.S. retailer that adapted its Email Security 3.0 platform in its operations. The 165,000 employees added is the largest deal for Mimecast. So, if it wins more clients of this size, the company will post higher recurring revenue in future quarters.

Product Offerings

Mimecast offers solutions in both infrastructure and security problems. In infrastructure, it provides customers with traditional backup, archiving, and continuity solutions. And in advanced security, its unified platform, MimeOS, includes the following:

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At its Annual Cyber Resilience Summit held in June, the company discussed its solution frame that covers primary attack surfaces. Co-Founder and CEO Peter Bauer said,

Our solution framework that covers the primary attack surfaces that organizations are exposed to today including perimeter defenses impersonation, insider threat detection, and brand exploit protection. This all increases the awareness of the broad range of solutions that Mimecast delivers on our unified platform of services.

Mimecast’s broad range of protection should appeal to customers looking to run on one vendor’s platform. The company may need to increase its advertising to raise awareness of its product offering.

Below: MIME stock barely rose since April while CrowdStrike returned 153.9%:

Chart
Data by YCharts

Mimecast added MessageControl to its platform to strengthen its threat detection offering. And since hackers and thieves often use email to target corporate staff, the R&D effort should justify its stock valuation.

Valuation

MIME stock scores poorly on a price-to-earnings measure:

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Data courtesy of SA Premium

At a $3.07 billion market cap, the company is valued below that of its peers. CyberArc Software (CYBR) is valued at $4.46 billion. CrowdStrike (CRWD) is worth 10 times more:

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Data courtesy of SA Premium

Since it competes more directly with customers using legacy Symantec equipment, investors should compare MIME stock with that of NortonLock (NLOK):

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Mimecast has a better growth score than that of NortonLock. And as revenue growth accelerates and profits rise, its value score will exceed that of NLOK stock.

On its conference call, CEO Peter Bauer gave an example of a customer choosing Mimecast’s Zone one and Zone two defenses solution:

a final example of an organization finding their legacy Symantec equipment to be ineffective at responding dynamically to the threat landscape is a North American health care provider with 7,500 employees. They purchased our Zone one and Zone two defenses, our continuity service to ensure availability of communications and our archiving service with the privacy pack to comply with industry-specific archiving requirements.

Outlook

Mimecast forecast Q2 revenue in the range of $120.8 million – $121.8 million. For FY21, it forecast revenue of $488.1 million to $493.1 million. The consensus estimate was $479.85 million. After MIME stock rose in the last few months, markets are not expecting any headwinds from the Covid-19 crisis. Still, investors should be aware that their customers are currently restructuring their business. This will restrict the company’s ability to upsell solutions.

Fortunately, the increasing need for cybersecurity protection in light of work from home will drive upsell rates. The company may achieve an upsell rate of 11% to 12%. In a 5-year discounted cash flow model: Gordon growth exit, Mimecast shares are trading at around a 20% discount:

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Data courtesy of finbox

The metrics used are:

Metrics

Range

Conclusion

Discount Rate

8.0% – 7.0%

7.50%

Perpetuity Growth Rate

3.5% – 4.5%

4.00%

Fair Value

$45.06 – $78.10

$56.87

Upside

-6.4% – 62.2%

18.10%

Readers may adjust the forecast by clicking the finbox model in the link above.

Your Takeaway

Mimecast is trading at unfavorable valuations. If its next quarterly earnings report on Nov. 2 exceeds estimates and the company raises estimates again, the stock may revisit yearly highs, which is close to my ~$57 price target.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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