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>> Logon Player 1 (Cestrian Stocks Bulletin #67)

Cestrian Stocks Bulletin
>> Logon Player 1 (Cestrian Stocks Bulletin #67)
By Cestrian Capital Research, Inc • Issue #67 • View online
Why everyone’s password is, er, “password”.

DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
We'll Tell You This For Nothing
As you know by now if you read our stuff, we run two versions of this newsletter. The free version (past issues here if you’re new to us) and the members-only version, an almost-free $9/month, which features our best actionable stock idea of the week. Sometimes a buy, sometimes a sell, sometimes a long term view, sometimes short term. In today’s free edition, we’ll share a very simple actionable idea, one which we plan to action ourselves in staff personal accounts.
And that idea is: consider buying the ForgeRock IPO once it starts trading, which is expected to be on September 15.
This being an IPO, literally anything could happen with the stock. Wild ride up, crazy spiral into the abyss, both on the same day, who knows. Our approach to new name listings is very simple. If the company is one we like - meaning, strong fundamentals, supportive end market dynamics, and likely a long future as an independent business - we’re happy to buy a small slug the moment they start trading. And then wait. Wait for the elation to peak, wait for the trough of despair to be escaped, wait for the quarterly earnings to be filed a couple times, wait for analyst price targets to be published, wait for the insider lockup period to expire, wait for the stock chart to have enough time to form a pattern. Waiting, as everyone knows, is boring. But that’s rather the point. When emotions around you are running high, and that’s never more true than at IPO time, make it Opposite Day at your desk and just tune out. Ignore the hoopla. Invest, as we always exhort you to do, like you’re dead inside.
So: briefly, this idea-for-free is, buy NYSE: FORG, don’t bet the farm, do nothing for a few months, see what happens, then start buying some more. In small chunks each time. Because we do think this one can run - and we think that in 3-4 years’ time, buying small pieces of stock in the first year or two is likely to look prudent, wise and profitable. Now, again, that’s a pretty boring idea. It doesn’t feature instant wins, margin, leverage, options, heartburn, or psychological damage. You may prefer to engage in these practices to liven up the day - we make no value judgments about that, each to their own. But us? We’ll be sat with resting heart-rates and undisturbed blood pressure come IPO time. Dead inside, you see.
Now, if you have a moment, allow us to walk you through our logic on this one.
Less Lactose, Same Indigestion
If you headed to your local DeLorean dealer, set the controls for 1971, fully fifty years ago, arrived, and said to the guys with bad hair and worse trousers crowded around the IBM 3270 terminal, hey how’s it going, they would most likely say, “well, we’re having a heckuva time trying to log on to the university mainframe. Can’t remember the password, you see. It was something to do with fondue, but we can’t quite recall what it was, and we have only two attempts left before it times out for an hour”. Inspired by your futuristic appearance - insofar as your trousers actually fit - they would conclude that since computing by 2021 surely would be mostly conducted entirely in the wetware, in some kind of mind-machine-meld, they might say to you, how does logon work in the 2020s, friend?
And you would say, er, well, we still have passwords. We do have email so re-setting passwords is easier than for you guys, but then again, everybody has not less than 50 passwords and nobody can remember them all, unless you use “password” as your password and then you find that you have been buying sneakers on Amazon and having them Prime’d all the way to an address you have never heard of in a country that you once visited. So in short, nothing has changed. Except now you can import sneakers more easily.
And the group would just blink at you and say, no, really, we had a guy here from like 1999 once, same kind of car as you, it was all looking so promising. What happened? And you would say, well, the future is a long time coming. Oh and hey - that password - was it ‘Lactose_Intolerance_1971’ you were thinking of?
The thing with investing in technology is that the product cycles tend to be waaayyyy longer than you think. As you know we are old folks here at Cestrian Towers (this newsletter is penned in greenscreen in fact) and we think back to those futuristic days of the late 1990s, specifically when Google came out and we sat there thinking huh, what can this do that Metacrawler can’t? At around the same time some of our number we were heard to muse, “but I have a digital camera already, why do I need one in my cellphone?”
When you think a product category is done in tech? It’s not done. Think about it - really think about it - what’s done? Word processing maybe, but that’s a function of monopoly power and network effects, it’s not product nirvana. Spreadsheets? Same story. Absolutely everything else remains in play. One theme we’re turning over in our idle minds is, one of the reasons software is still growing so quickly is that it is still awful. We mean really basic. For instance in order to run our very simple business we use about 20-30 different code packages and they don’t talk to each other very well, the amount of manual work required is still mind boggling, and the absence of any form of meaningful machine intelligence in this apparent age of machine intelligence is also remarkable.
So, back to logon. Logon processes are supposed to keep systems secure but are in fact the bane of security professionals’ lives. No, wait. Users are the bane of their lives. Followed by anything that has any proximity to a user. Computers would be sooo much more secure if it wasn’t for those pesky users. We remain in the dark ages when it comes to solving for logon. Cellphones are a little further ahead than computers, what with built-in facial recognition, second factor authentication via app or text, etc, but they are still far from perfect. So a company that provides a little piece of the puzzle in solving for this yawning gap in security architecture? This, we like.
ForgeRock is expected to start trading on the NYSE soon, as $FORG. You can find the company’s S-1 here. This identity management software vendor says its vision is “a world where you never login again”. The notion being that you trust your ID to someone like FORG and that everywhere you go, FORG - or $AAPL or $OKTA or someone like that - is sat on your shoulder doing the ID bit when you want to open an application, go through a door, whatever. Now this makes sense of course. Writing passwords down and keeping them in the top draw has long been a threat vector that drives cybersecurity professionals nuts. So if there was a way to abstract identity away from the user, every sysop out there would love it. As would every CFO because less manual systems means less sysops means …. more lovely stock buybacks!
There are other players already active and growing in the identity management sector of course. Okta ($OKTA) is probably the best know, SailPoint Technologies ($SAIL) also plays in the space, and Ping Identity ($PING) is the grab-bag of choice if you want to know where legacy authentication companies go to when they become unable to look after themselves anymore. But back to our point about product cycles. If we had to guess we would say that it will still be decades before identity management is anything like solved. And that means there is very likely room for a number of new-to-the-public-market stocks yet, FORG amongst them.
FORG has solid financials - FY12/20 revenue of $128m, up 23% on FY12/19; H1 FY12/21 revenue of $85m, up 53% on the same period in 2020 - so growth just accelerated which is, of course, a good thing. Gross margins are good at 83% for FY12/20 and the same for the first half of FY12/21. EBITDA losses were $25m in FY12/20 and $5m in the first half of FY12/21, meaning narrowing losses and a path to accounting profitability - normal for new name software IPOs. Weaknesses? Cashflow is a little weak - negative $34m in H1 of FY12/21 which given a big cash raise at IPO time will be fine, but we want to see those cashflow margins improving and turning positive within say 18-24 months. The reason those margins are poor is that whilst the company does runs a deferred, prepaid revenue model, such prepayments sat at just $55m in June this year, representing around 35% of TTM revenue; in the best-run software companies you’ll find that deferred revenue is close to or above 100% of TTM revenue. So we’d like to see FORG improve on this front too. Doesn’t put us off buying the IPO but it is something we’ll monitor as the company progresses.
We think the market has plenty of appetite yet for new name listings in the identity management space, and we think that means that FORG will have time to work out its problems and challenges against a backdrop of generally rising sentiment in software. The lowish level of deferred revenue does mean an earnings surprise could hit within the first year or two, which is yet another reason not to bet the farm on day one here. We do expect some vertiginous dips to buy along the way.
But back to the happy stuff. High growth company, underserved segment, we think this will be a winner over the coming years, so we’re buying at IPO time and expect to buy more over time, particularly on any short-term earnings misses. Simples!
Free Stuff
ForgeRock will feature in our ‘Cestrian Tech Select’ service which runs on the StockTwits platform. Just $29/month, we cover all the top names in cloud software and beyond. The work is pro-grade, the presentation is simple, direct and actionable, and in the live chat service you get direct access to Cestrian staff.
You can take a free seven-day trial of the service during September - just CLICK HERE to start your trial.
Cestrian Capital Research, Inc - 12 September 2021
DISCLOSURE - Cestrian Capital Research, Inc staff personal accounts hold long positions in $SAIL, and intend to buy $FORG once trading commences.
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