Cellebrite (NASDAQ:CLBT) is a professional services company that provides software and consultations for public entities to solve issues around digital data collection, analysis, and investigation, along with cybersecurity platforms. The company can be classified as a forensic cybersecurity company that aids law enforcement in combing through digital information, while also increasing analytical capabilities, and maintaining secure endpoints (devices, servers, etc.).
Due to the nature of the services, most customers are public entities around the world, rather than other businesses. The company does have a small private enterprise market that may be an area of organic growth in the future. For now, reliance on public spending can lead to lumpy, volatile growth due to contracts and bureaucracy.
One major competitor in the field of forensic cybersecurity and data is Magnet Forensics (TSX:MAGT:CA). I recommended the company for speculative growth investors last summer, although still wary about extended valuations. However, it has recently been announced that Magnet will be acquired by private equity, leading to an 80% total return since that prior article was published. Before, I chose MAGT over CLBT due to more historical data to provide clarity, along with growth trends at the time. However, now that CLBT is the only major player in the segment, they are worth a revisit.
As shown, Magnet and Cellebrite are leaders. IDC remains just as bullish on Cellebrite as Magnet, and this should lead to continued market leadership for years to come. As reported:
'Cellebrite’s investment in R&D is a sizeable component of its total revenue; customer references confirmed the value that this brings to its product suite.' It also quotes a Cellebrite customer saying, 'research and development keeps them at the forefront of technological development and therefore offers cutting edge solutions.'
The IDC MarketScape explains that '[Cellebrite’s] user interface feels like best-in-class, fresh, next-generation technology; it is intuitive and easy to use, yet also both thorough and speedy.' It also states that Cellebrite customers 'noted that the scope of the devices supported is unmatched by its competitors.'
The report also acknowledges that 'Cellebrite is focused on cloud delivery models to provide flexibility and agility in data processing and AI for workflow automation, specifically in image processing,' and that 'Cellebrite has some considerable IP in visual analytics.'
Therefore, Cellebrite is a viable alternative for investors to look at, especially considering Open Text is a far different form of investment. I will now cover the financial data, and readers may notice the similarities between Magnet and CLBT.
The forensic cybersecurity industry is unique, balancing profitable services and high organic growth. For Cellebrite, growth was rapid after IPO in 2020, reaching a peak of 40% YoY in Spring 2021. However, growth has trailed off from there and is now less than 9% for the most recent earnings in Fall 2022. This is partially due to strong comparables after a bull market, and the fundamentals of a slower moving service-based industry. Contracts with governments will be large, but lumpy, leading to volatile revenues per quarter. Once the company matures more this factor should be negated adding more certainty to general growth rates.
Underneath the lumpy organic growth of public entity contracts is significant growth of annual recurring revenue. Cellebrite is heavily expanding their cloud services, and subscriptions will be the primary growth drivers in the future. There is also data that suggests clients are willing to spend more each year, leading to high net retention of 129%. As long as this continues to occur, there will be less stress on forcing organic growth through finding new customers. Current clients come first, and this may lead to increased profitability in time (S&M can get expensive).
While revenue growth may not be hyper-growth levels like other cybersecurity firms, Cellebrite does have a pattern of significant profitability during bull cycles. During 2020 and 2021, EBITDA margins reached a peak of 15-20% during multiple quarters, although the past year has seen earnings dip. While EBITDA has fallen of late, Net Income has been high due to accounting of intangibles, contract payments, and other factors. When taking out these factors, plus investments in growth, Gross Margins remain high at 79-82% per quarter, indicating profits are possible in time. I know investors want to see profitable growth, but investment now should pan out well for investors in the long run.
Thanks to profitability, Cellebrite has no issues with their balance sheet apart from IPO period dilution. The chart below seems to suggest steep dilution, but the shares outstanding only rise from 187 to 189 million due to SBC. Cash on hand remains high compared to free cash flow losses, if they do occur, so operations are set to continue unhindered and without the need for debt or dilution. Then, in years to come, profits can be redeployed towards meaningful leveraged buyouts, buybacks, and perhaps even a dividend in time.
The last key to the puzzle is always valuation. While CLBT is strong on a financial basis, the valuation can be worrisome to some due to the slip in profits over the past year. However, as I discussed in my Magnet Forensics article, Cellebrite’s valuation is quite competitive. It has also continued to fall on a market cap and P/S basis over the past six months. The current 3.1x P/S ratio is now at a tantalizing level, especially considering Magnet is being bought out at almost three times this valuation (8.7x).
I believe that it is a no-brainer that investors holding Magnet Forensics should redeploy their capital into Cellebrite if they want to continue having exposure to digital forensics. The industry is young, small, and led by these two companies. Now that Cellebrite is the sole player, investors may flock to the name and drive a higher valuation. Also, we can anticipate that the chance for an acquisition is also high, further leading to upside from current levels.
It will just be important to note that Cellebrite is small and revenues/earnings remain volatile. This will lead to fluctuations in the valuation and may lead to further downside in the shares. However, recurring investments and a long-term mindset will help reduce risk. In the end, I believe Cellebrite will mature into a well-performing company if current execution continues.
Thanks for reading.
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