IronNet: Avoid This Name
Summary
- IronNet's guidance for the year goes from impressive growth to declining revenues.
- Management assures investors that sign-ups aren't lost, but simply delayed.
- Why investors should avoid this very expensive stock.
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Investment Thesis
IronNet (NYSE:IRNT) is a cybersecurity company. Its prospectus states that IronNet can "see, detect and defend against sophisticated cyber attacks earlier and faster than ever before."
However, it appears that IronNet had a misfire where the company, which became public via a SPAC, saw revenues coming in that actually were not coming in at all this year.
The stock has sold off by 20% post-earnings; however, I make the case that investors should not look to buy the dip here.
Note: IronNet's fiscal year and calendar year are misaligned. I'll only refer to its fiscal year.
IronNet's Revenue Growth Rates Decelerate
(Source)
IronNet puts out guidance last night that rather than growing its revenues during fiscal 2022 by 48% y/y as we can see above, it now appears that its revenues are actually contracting by 10% y/y to $26 million for fiscal 2022.
This newly revised guidance is made substantially worse when one considers that just 90 days ago, management had stated that it was expecting to "meet [its] growth objectives for the full year." Why is this a problem?
The first problem boils down to investor trust. If investors don't trust management's forecast, the stock will never get the multiple it deserves.
The second problem I see here is that management would likely have known that there was a chance it wouldn't meet its growth objectives for this fiscal year when just 90 days ago it reaffirmed its guidance.
The third problem appears to be that there's a meaningful amount of customer concentration.
(Source)
Even though we don't have the SEC filings from its Q3 2022 results, we can nevertheless see above that there's a substantial amount of customer concentration where a large portion of IronNet's revenues comes from just 2 customers.
What's more, the revenue concentration from the two customers in last year's fiscal period ended July 2020 is different from this year's period ended July 2021. Naturally, this brings up the question of just how repeatable and recurring its revenue model actually is?
(Source)
What Happened to IronNet?
During the earnings call, management highlighted that the signing up of large multimillion-dollar customer opportunities had been delayed. If you look back to fiscal Q2 2022, at the time, IronNet stated that the anticipated closing of several large new customer contracts had been pushed out into the third quarter.
So when management this time again sees customer sign-ups being delayed, investors start to lose patience.
IRNT Stock Valuation - Simply Too Hard
At the time of writing, the stock has sold off by 20% after hours. This means that investors are asked to pay approximately a $500 million market cap for this cybersecurity company. Given its renewed guidance, this puts the stock trading at 19x this year's sales.
If IronNet had been growing its top line at more than 100% y/y into fiscal 2023, as we were previously led to believe, paying 19x forward sales would have been a truly cheap multiple.
However, when management itself struggles to forecast the trajectory of the business, it makes it difficult for outside investors to have any chance here.
The Bottom Line
(Source)
During the earnings call, we hear how IronNet remains optimistic over its future, and how the delays in customers signing up are temporary. At the same time, IronNet declares that they are not proud of their performance as a public company.
And while one's instinct is to think, "OK, this is just a minor setback, and if I liked the stock at $9, I should like it even more at $5", that type of thinking in this instance isn't helpful.
Having been in this exact same situation countless times in the past, I've learned the hard way over time, that the best course of action is to put one's hands up and state, "I made a mistake here."
To exit the position and revisit the situation afresh in 6 months or so. Good luck and all the best.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.