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On today’s Breakouts report, there are 33 stocks on the positive breakouts list (stocks with positive price momentum), and 50 stocks are on the negative breakouts list (stocks with negative price momentum).

Featured today is a newly listed stock that has more than doubled in value in just a few months – Magnet Forensics Inc. (MAGT-T). As of Sept. 14, the share price is up 183 per cent from its initial public offering price of $17.

Two weeks ago, the stock appeared on the positive breakouts list when the share price closed at a record high of $64.90 on Aug. 31.

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Since then, however, the share price has tumbled 26 per cent (closed at $48.06 on Sept. 14). Despite this move lower, the share price remains above the target prices from all four analysts. As such, this is a stock to watch. A buying opportunity may emerge if the stock price continues to fall.

A brief outline on Magnet Forensics is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Waterloo, Ont.-based Magnet Forensics’ cloud-based investigation software platform analyzes data from digital sources including computers, cell phones, and servers, gathering evidence in crimes and cybercrimes.

The company has a diversified customer base. As at Dec. 31, the company had more than 4,000 customers in over 90 countries, of which 65 per cent were from the public sector and 35 per cent were from the private sector. By geography, 60 per cent of the company’s clients stemmed from North America, 25 per cent from Europe, Middle East and Africa, 12 per cent in Asia-Pacific, and 3 per cent stemmed from Latin America. In 2020, the top 20 customers accounted for roughly 22 per cent of its total revenue and its largest customer represented approximately 6 per cent of total revenue. Customers include IBM, Allstate, GlaxoSmithKline, Chevron, Bank of America, the World Health Organization, Amazon, the Federal Bureau of Investigation (FBI), and London’s Metropolitan Police Service (the Met).

There is seasonality in the company’s operations with higher revenue generated in the second half of the year compared to the first half.

Investment thesis

  • Expanding market. Greater digital connectivity is creating a need for cybersecurity.
  • Workforce ramp-up. On the earnings call, the CEO indicated that around 100 new hires will be made between Aug. and year-end. To put this in perspective, in the company’s April investor presentation, management stated that they had over 270 employees.
  • Acquisition growth. CEO Adam Belsher remarked on the second quarter earnings call, “We’re active in terms of M&A [mergers and acquisitions] on discussions with companies that either would be complementary to our platform and augment our platform and/or help us accelerate our move into adjacent markets.”
  • Recurring revenue business model. Recurring revenue represented 81 per cent of total revenue in the second quarter. Management aims to increase ARR (annual recurring revenue defined as annualized value of recurring revenue contracted) by focusing on increasing its term license contracts compared to its perpetual licenses.
  • Healthy balance sheet. The company raised $115-million from its initial public offering and had US$108.8-million of cash on its balance sheet as of June 30.
  • Key potential risks to consider include: 1) rich valuation of tech stocks; and 2) risk of multiple compression, especially if there is weakness in stock market indices.

Quarterly earnings reported

Before the market opened on Aug. 10, the company reported its second-quarter financial results. Revenue was US$16.5-million, up 42 per cent year-over-year. Recurring revenue was US$13.3-million, up 72 per cent year-over-year, and represented 81 per cent of total revenue. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) stood at US$4.4-million, unchanged from the same period last year. ARR was US$49.6-million, up 48 per cent year-over-year. That day, the share price rallied 11 per cent, and jumped a further 14 per cent the following day on high volume with over 350,000 shares traded each day. The three-month historical daily average trading volume is approximately 117,000 shares.

Management guided to revenue of between US$65.5-million and US$67.5-million in 2021, up from $51-million reported in 2020, representing an increase of between 28 per cent and 32 per cent year-over-year. Management anticipates adjusted EBITDA will be between US$11.7-million and US$13.7-million (adjusted EBITDA margin of between 18 per cent and 20 per cent) in 2021,

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Dividend policy

The company does not pay its shareholders a dividend.

Analysts’ recommendations

This small-cap tech stock with a market capitalization of approximately $1.9-billion is covered by four analysts. The stock has a unanimous buy recommendation.

The firms providing research coverage on the company are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, National Bank Financial, and RBC Dominion Securities.

Revised recommendations

After the company reported its quarterly financial results in Aug., all four analysts revised their expectations materially higher.

  • BMO’s Thanos Moschopoulos raised his target price to $45 from $27.
  • Canaccord’s Doug Taylor increased his target price to $42 from $28.
  • National Bank’s John Shao hiked his target price by $10 to $45.
  • RBC’s Paul Treiber lifted his target price to $47 (the high on the Street) from $30.

Financial forecasts

The following financial figures are expressed in U.S. dollars.

According to Bloomberg, the consensus revenue estimates are $67-million in 2021, $87-million in 2022, and $113-million in 2023. The consensus EBITDA estimates are $13-million in 2021, $13.1-million in 2022, and $19-million in 2023. The Street is forecasting earnings per share of 19 cents in 2021, 19 cents in 2022, and 29 cents in 2023.

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Earnings expectations have increased modestly. For instance, three months ago, the consensus revenue estimates were $66-million for 2021 and $84-million for 2022. The consensus EBITDA estimates for 2021 and 2022 were $11-million and $12.7-million, respectively.

Valuation

Analysts commonly value the stock on an enterprise value-to-sales basis.

According to Bloomberg, the stock is trading at an EV/sales multiple of 17.5 times the 2022 consensus estimate, and at 13.5 times the 2023 consensus estimate.

The average 12-month target price is $44.75, implying the share price is fully valued. Individual target prices are as follows in numerical order: $42, two at $45, and $47.

Insider transaction activity

Since going public, there has not been any trading activity in the public market reported by insiders.

Chart watch

The stock just began trading on the Toronto Stock Exchange in April. Given Magnet Forensics very brief trading history, technical analysis is limited.

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As of Sept. 14, the share price is up 183 per cent from its initial public offering price of $17. Magnet Forensics’ share price closed at a record high of $64.90 on Aug. 31.

This month, the positive price momentum reversed its course. Month-to-date, as of Sept. 14, the share price has declined 26 per cent. Should the share price continue to slide, there is technical support around $40, just above its 50-day moving average (at $39.29).

POSITIVE BREAKOUTSSept. 14 close
CLIQ-TAlcanna Inc. $7.59
AND-TAndlauer Healthcare Group Inc. $49.24
ATZ-TAritzia Inc. $42.01
BTE-TBaytex Energy Corp $2.65
BLU-TBELLUS Health Inc. $7.04
BEI-UN-TBoardwalk Real Estate Investment Trust $48.60
CERV-TCervus Equipment Corp $19.38
CIX-TCI Financial Corp $26.09
DPM-TDundee Precious Metals Inc $8.25
ECN-TECN Capital Corp. $10.82
EFR-TEnergy Fuels Inc $9.48
GC-TGreat Canadian Gaming Corp $44.95
IGM-TIGM Financial Inc $47.59
JWEL-TJamieson Wellness Inc. $37.56
LAC-TLithium Americas Corp $29.61
ML-XMillennial Lithium Corp. $4.00
NVEI-TNuvei Corporation $163.69
NVA-TNuVista Energy Ltd $4.18
OGC-TOceanaGold Corp $2.46
PLC-TPark Lawn Corp. $37.85
POW-TPower Corp of Canada $43.86
PVG-TPretium Resources Inc $13.06
SNC-TSNC-Lavalin Group Inc $37.80
STN-TStantec Inc $64.97
SRX-TStorm Resources Ltd. $4.38
TECK-B-TTeck Resources Ltd $32.67
TVK-TTerraVest Capital Inc $23.97
TOI-XTopicus.com Inc. $133.38
TOU-TTourmaline Oil Corp $40.37
TCN-TTricon Residential Inc $16.36
UEX-TUEX Corp $0.59
URE-TUr-Energy Inc $2.36
WILD-TWildBrain Ltd. $2.94
NEGATIVE BREAKOUTS
AT-TAcuityAds Holding Inc. $9.26
AC-TAir Canada $22.87
AHC-TApollo HealthCare Corp. $2.11
ACB-TAurora Cannabis Inc. $8.24
ACQ-TAutoCanada Inc $43.41
CNC-XCanada Nickel Co. $2.53
CP-TCanadian Pacific Railway Ltd $86.48
WEED-TCanopy Growth Corp. $18.98
CWEB-TCharlotte's Web Holdings Inc. $2.65
CHR-TChorus Aviation Inc $3.83
CMC-XCielo Waste Solutions Corp. $0.63
DOC-XCloudMD Software & Services Inc. $1.67
CRON-TCronos Group Inc. $7.38
CURA-CNCuraleaf Holdings Inc. $13.69
DII-B-TDorel Industries Inc $11.58
DHT-UN-TDRI Healthcare Trust $7.55
EMP-A-TEmpire Co Ltd $38.34
EGLX-TEnthusiast Gaming Holdings Inc. $4.90
GAU-TGaliano Gold Inc. $0.92
GTMS-TGreenbrook TMS Inc. $12.51
HARV-CNHarvest Health & Recreation Inc. $3.41
HEXO-THEXO Corp. $2.62
IMCC-CNIM Cannabis Corp. $3.92
LGO-TLargo Resources Ltd. $16.08
LNR-TLinamar Corp $68.64
LUN-TLundin Mining Corp $9.42
MDF-TMDF Commerce Inc. $6.97
MMED-NEOMind Medicine Inc. $2.91
MOGO-TMogo Inc. $5.75
NFG-XNew Found Gold Corp. $7.83
PPTA-TPerpetua Resources Corp. $6.13
PLTH-CNPlanet 13 Holdings Inc. $5.60
PTM-TPlatinum Group Metals Ltd $3.01
REAL-TReal Matters Inc. $11.34
RECP-TRecipe Unlimited Corp. $19.63
RFP-TResolute Forest Products Inc. $12.98
RCI-B-TRogers Communications Inc $59.91
SMT-TSierra Metals Inc $2.54
TOY-TSpin Master Corp. $44.43
SOY-TSunOpta Inc. $11.56
SYZ-TSylogist Ltd. $10.39
TD-TToronto-Dominion Bank $81.76
TRZ-TTransat AT Inc $4.32
TCL-A-TTranscontinental Inc $21.50
TFPM-TTriple Flag Precious Metals Corp. $12.58
TNT-UN-TTrue North Commercial REIT $7.33
VMD-TViemed Healthcare Inc. $7.79
VFF-TVillage Farms International $10.76
WPRT-TWestport Fuel Systems Inc. $4.25
Y-TYellow Pages Ltd $13.90

Source: Bloomberg and The Globe and Mail

Please note that this report is not an investment recommendation. The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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