Original Recommendation

Carbon Black

Carbon Black (CBLK)

our opinion

buy

current price

$15.81

target price

$21.00

market cap

$1.1B

div yield

0.00%

  • Carbon Black's cloud-based endpoint security segment grew revenue by 71% y/y. The company continues to gain market share.
  • A company like Symantec will need to buy a cloud-based platform as they transition away from on-premise security solutions.

trade details

On Wednesday, June 12th, CrowdStrike began trading on NASDAQ under the symbol (CRWD). Shares immediately popped over 70%, rising from the IPO price of $34 to over $60 per share. At the time of this writing, CrowdStrike is now valued at roughly $12 billion.

Why are we talking about CrowdStrike’s IPO when we’re recommending that you buy Carbon Black? Great question.

Carbon Black competes against CrowdStrike in the hyper-competitive endpoint security industry. Carbon Black supplies a cloud platform to capture and analyze endpoint data so customers can detect and block cyber attacks before there’s a major breach or security issue.

For example, Ransomeware has become a very popular cyberattack that will lock your computer, threaten to erase your files, or worse. Enterprise companies in this situation are held hostage when the cyberattacker demands payment. This is an ever-growing threat to Fortune 500 companies, which is why Carbon Black and CrowdStrike exist. They both offer solutions to prevent and block these types of attacks.

Since 2015, Carbon Black’s revenue has grown 44% annually. However, the company is projecting 2019 revenue of $241 to $244 million, an increase of only 17% y/y. Growth is slowing and the company is not yet profitable. This has clearly weighed on the company’s share price and valuation.

This brings us back to the comparison of Carbon Black to CrowdStrike. As mentioned, Carbon Black is projected to have annual sales of $244 million this year. While CrowdStrike has not formally issued guidance, their trailing twelve months (TTM) revenue was just under $250 million for fiscal 2019. Both companies remain unprofitable, however, Crowdstrike is burning through significantly more cash than Carbon Black. Carbon Black is estimated to lose $43 million this year, while CrowdStrike burned through per $140 million last year.

Given that Carbon Black and Crowdstrike offer very similar solutions, why is CrowdStrike valued at $12 billion while Carbon Black is valued at just over $1 billion? Yes, CrowdStrike’s revenue is growing at a faster pace than Carbon Black, but something doesn’t add up here.

While CrowdStrike is likely just the latest IPO darling with an absurd valuation, we do believe the market is undervaluing Carbon Black’s potential.

According to Gartner, the endpoint security market is currently worth $7 billion. Carbon Black has over 5,300 clients including 35 of the Fortune 100. Carbon Black began offering a cloud platform a couple of years ago, and now has over 3,100 cloud customers. Their cloud segment is growing at a rapid pace – clients increased 69% y/y. Annual Recurring Revenue (ARR) for the cloud platform increased 71%.

Carbon Black is clearly gaining market share in the cloud. CEO Patrick Morley recently commented on Carbon Black’s market share, saying “the $7 billion endpoint security market we compete is only 15% on the cloud now — but by 2025 75% will be there. We are enjoying mid-teens revenue growth. While our on-premise revenues are flat, we are enjoying 70% annual recurring revenue growth on the cloud and gross customer retention of 87%.”

Companies like Symantec will need to migrate from on-premise solutions to cloud-based solutions. They could attempt to do this on their own, but they’ve already lost considerable market share to Carbon Black and CrowdStrike. Symantec, an $11 billion dollar cybersecurity giant, could easily buy Carbon Black for $2 billion. This would immediately give them access to the cloud-based solutions they desperately need to remain relevant to enterprise clients. We’ve seen the M&A market heat up with acquisitions of Tableau, Ultimate Software, and SendGrid, to name a few. It wouldn’t surprise us to see Carbon Black acquired in the coming months.

We are recommending buying shares of Carbon Black up to $16 per share. Our target price is $21, which we arrived at by placing a 6X multiple on their 2019 revenue. We feel that this is an appropriate valuation, given that companies in the space receive multiples of 10 to 20 times annual revenue. Place a 30% stop-loss as a protection.