Vista Equity Partners has agreed to buy KnowBe4 for $4.6 billion in cash, a 16X revenue multiple. KnowBe4, founded in 2010, is the world’s first and largest New-School security awareness training and simulated phishing platform, assisting in managing the ongoing social engineering problem. The integrated platform enables users to train and phish their users, monitor their Phish-prone percentage, and obtain measurable results. Vista Equity Partners is offering $24.90 per share, which represents a 15.8x multiple on revenues and a 44% premium over KnowBe4’s closing price of $17 on September 16, the day before Vista publicly disclosed its initial non-binding acquisition proposal on its Schedule 13-D.
The technological world is rapidly evolving, with more enterprises migrating to cloud infrastructures, a more remote-first and distributed workforce, and critical information being captured digitally. As the cloud becomes more prominent, securing data and company resources will be a crucial business consideration for every business. Cyber Security will play an essential role in mitigating associated risks in the coming years, and the rising valuation multiples of publicly listed cybersecurity companies reflect the growing demand for this sector both from consumers and investors.
The Cyber Market
The cybersecurity market has gained traction following Russia’s invasion of Ukraine, as analysts believe attacks aimed at shutting down websites will become more common in the future. Congress has also passed infrastructure legislation, which includes funding for federal, state, and local cybersecurity infrastructure, which will be another significant growth driver.
The cybersecurity sector is poised for a surge in acquisitions due to the rising number of new entrants, and significant deals like KnowBe4 will further boost valuation multiples in the industry. Consolidation, according to industry experts, is positive news as customers face substantial challenges in configuring and deploying an overwhelming amount of security tools. Businesses have adopted new security tools because of rapid digital transformation and cloud migration, but adding more security tools frequently has brought new complexities. As a result, investor and customer sentiment toward M&A transactions has been highly positive. According to Finerva, over 430 Cyber Security deals were announced in 2021, 2.5 times more than 2020. The report also shows that EV/TTM Revenue multiples for Cyber Security companies averaged 8x in 2020 and increased by more than 50% in 2021, stabilizing at just over 12x in Q4 2021 and rising to a 15.8x today with the recent acquisition of KnowBe4.
Potentially Undervalued Companies
Although a few large and established companies in the Cyber Security sector, such as Fortinet Inc. (FTNT), command a premium valuation, a few undervalued ones also have excellent prospects for outperformance.
NortonLifeLock NLOK, a Fortune 500 company, is a cybersecurity software provider that secures computers against viruses, spyware, and other malware. LifeLock helps to protect against identity theft and fraud, while Norton’s Internet security products protect against online threats. With 80 million users in over 150 countries, the company’s cyber safety product offerings have long maintained their positions as some of the most recognizable consumer-focused security and identity-protection products. Other security products from NortonLifeLock include web security, email security, and data security solutions. Norton stock has dropped 19% YTD over the delayed merger with Avast due to competition concerns raised by U.K.’s Competition and Markets Authority (CMA). However, the deal closed last month, and this acquisition is a significant development for NortonLifeLock. Avast is a provider of an advanced threat detection network using Machine Learning and Artificial Intelligence technologies to detect and stop threats in real-time. NortonLifeLock stock is likely to recover as the company continues to improve its top and bottom lines amid the completion of the merger with Avast.
Zscaler ZS is a provider of cloud-based security-as-a-service. The company is known for its Zero Trust Exchange platform, which assists enterprise customers in protecting their employees, applications, and data as infrastructure. Its flagship product, Zscaler Internet Security, is a gateway connecting the right user to the right application. Strategic partnerships allow the company to expand its capabilities. Zscaler collaborated with Siemens, an automation and digitalization innovation leader, to develop a solution that combines the Zscaler Zero Trust Exchange cloud security platform and Siemens’ devices to assist customers with operational technology (OT) infrastructures in accelerating their digital transformation efforts. The company also announced deeper integrations with CrowdStrike (CRWD), a leading cloud security company, to enable superior threat protection. Zscaler stock is down 50% this year, but its financials are improving. Zscaler has secured more large customers with annual recurring revenue of more than $1 million. In Q4, its total number of customers with more than $1 million in ARR increased by 62%, with over 320 customers exceeding $5 million in ARR. The company’s free cash flow is rising, which means it can make strategic investments while continuing to innovate and expand to capitalize on the massive opportunity ahead.
HUB Cyber Security Israel Ltd. HUB is an Israeli provider of computing solutions to safeguard sensitive commercial and government data. The company offers end-to-end data protection and next-generation encryption technologies, such as quantum computing defense, across the entire data lifecycle. HUB Security has formed several partnerships and agreements to expand its global sales and market presence. It also plans to enter the Internet of Things (IoT) market and launch HUB Technology in Silicon in 2023. Despite suffering significant losses in 2021 due to lower demand and higher R&D costs, the company expects $115 million in revenue this year. With a 15.8X revenue multiple, the company’s fair market value based on comparable deals reaches $1.8 billion market cap. HUBHUB’s SPAC deal with Mount Reinier for a NASDAQ listing, announced on March 23, values the company at $1.25 billion, well below the fair value implied by a circa 16X sales multiple. This represents an unusual approach by HUB’s management that have taken the lower end of the valuation range to leave a substantial upside for their investors. Furthermore, this valuation does not include the $500 million in contracts they have signed for the next few years, which would easily put them at a $3 billion valuation range. HUB Security’s first-mover advantage and growing revenues in a rapidly growing Confidential Computing market make it an exceptional investment opportunity.
Businesses and government agencies are becoming more vulnerable to cyberattacks, which can result in financial and human losses, particularly as cloud migration and remote-first work become more common. As a result, demand for Cyber Security will rise further, and now is the time to invest in undervalued innovative companies operating in this business sector.
The Future of Cyber Security Institute (FCSI) is a digital thought brand under The Future Markets Research Tank, offering commentary and exploration into the current and future state of the cyber security industry. Read our disclaimers: https://www.futuremarketsresearch.com/disclaimers
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