Why Credit Suisse Thinks Secureworks Shares Warrant Valuation Discount

Secureworks Corp

warrants a valuation discount, Credit Suisse said while starting coverage of the stock with a Neutral rating and $14.50 target price. The brokerage noted that "SecureWorks currently trades at an enterprise value to next-twelve-months (NTM) revenue multiple of 2.4x, which represents a 40 percent discount to the overall software industry average multiple of 4.0x and a 57.9 percent discount to the high-growth software sector multiple of 5.7." Though SecureWorks's projected revenue growth of 21.6 percent is similar to the overall high-growth software sector's growth rate (26 percent), analyst Philip Winslow said the company is currently unprofitable and free cash flow negative, with a "structurally lower" target gross margin of 60-62 percent. "We therefore believe SecureWorks's lower revenue growth, combined with its near-and long-term operating model profile, currently warrant a valuation discount compared with high-growth software peers," Winslow wrote in a note. In addition, SecureWorks is a tracking stock majority owned by Dell, which controls 98.5 percent of all voting rights. Such stocks typically trade at a discount. Though the company is in a strong position in a growing industry, Winslow said the market for managed security services, (MSS), and security consulting is "fragmented, rapidly evolving, and highly competitive." "Some of SecureWorks's competitors and potential competitors, particularly in the large enterprise market, have advantages owing to their longer operating histories, greater brand recognition, larger client bases, more extensive relationships within large commercial enterprises, more-mature IP, and greater resources," Winslow highighted. The analyst expects the company to maintain negative operating cash flow until FY2018 and free cash flow until FY2019. The next catalyst for the stock is in early June when the company reports first quarter earnings. Shares of SecureWorks closed Monday's regular trading session up 10.2 percent to $13.81.