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SecureWorks: On The Way Down

Apr. 09, 2018 3:48 AM ETSecureWorks Corp. (SCWX)4 Comments
Gary Alexander profile picture
Gary Alexander


  • SecureWorks has sunk to new all-time lows on the back of its Q4 earnings report.
  • Despite a modest top-line beat and decent FY18 guidance, SecureWorks showed an alarming decline in its gross margins.
  • Revenue growth has slowed down to the single digits, as SecureWorks faces competition from best-of-breed companies like Splunk as well as emerging startups.
  • Its relationship to Dell (which owns 86% of the company) is another risk, as Dell is exploring multiple avenues for paying down its debt which can involve gutting its subsidiaries.
  • Though SecureWorks appears cheap, the risks far outweigh the opportunities.

There seems to be a storm of issues swirling around SecureWorks (NASDAQ:SCWX) at the moment, in a 2018 that has thus far seen the stock plunge 12% to new all-time lows. At this point, value investors are likely crowding around the stock, wondering: is this the right time to buy into a rebound?

ChartSCWX data by YCharts

As with most falling knives, buying into SecureWorks now would be playing with fire. The stock has attracted a bevy of Wall Street downgrades recently, and while analyst opinions should almost always be taken with a grain of salt, the considerable power they have over negative market sentiment should definitely be noted. I don't see SecureWorks climbing out of this hole, at least not anytime soon.

The spectre of Dell

Some investors might be thinking: how bad of a position can a company owned by Dell (DVMT) be in? After all, doesn't the PC giant have essentially unlimited resources to "save" SecureWorks?

In my view, the fact that Dell has a controlling stake in SecureWorks - 86% of the company, according to the 10-K that SecureWorks filed a couple of weeks back - is more of a risk than a safeguard.

The reason is simple. Dell has recently been struggling with its >$50 billion debt load, and in the wake of new Trump tax regulations that limit interest deductibility to just 30% of EBITDA, it's no longer capital structure-optimal for Dell to retain the huge debt that it incurred in buying EMC two years ago.

The company has explored a variety of options to raise cash quickly to pay down debt. One of the major strategies that it has floated has been a "reverse merger" of VMware (VMW), in which Dell acquired a majority stake through its purchase of EMC. Like

This article was written by

Gary Alexander profile picture
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.

Analyst’s 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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