Left Brain Thinking: December 30, 2020

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. Today we're talking cybersecurity stocks in light of the recent SolarWinds breach and international cyberattacks. And we're having that conversation with Nolan Langford, chief executive at Left Brain Investment Research. Learn more about the firm and its research at leftbrainir.com and on Twitter @leftbrainir. Nolan Langford, great to chat with you again.

Happy holidays, Chuck. It's great to be back. It's great to be talking cybersecurity.

And cybersecurity is an issue that is particularly important to you right now. So much so that the Fortune Maker series, something that you guys have been doing at Left Brain, a live Zoom event Your next installment is all about cybersecurity. It's going to be held on January 7th at 5 PM, and I should let everybody know that details are available at leftbrainir.com, or they can go to eventbrite.com and search Left Brain Investment Research to get more on the Fortune Maker series. And that will be all about cybersecurity, and we're not going to give too much of that away, but right now, given the headlines, cybersecurity it's not just in the headlines, it's banging in the portfolios because, well, quite honestly, you look at the cybersecurity stocks and they're up massive amounts just in the last month, right?

You're exactly right. And in this case, we think the fundamentals for the most part justify it. So right, the cybersecurity stocks are up, but you know, if you take a look at the business trends, the need for cybersecurity solutions to protect the data, to protect the important valuables of corporations, which are all going online and digital, I think cybersecurity becomes more and more important. You're going to have bigger budget allocations from the CIO suite, and I think it's not going to be a discretionary item. I think it's going to be a mandatory item, and it's going to take up larger budgets. You're likely to see a lot of these stocks, particularly the leading companies in the space, continue to gain wallet share, market share, and share price appreciation. So you're right.

In fact, it seems a natural adjunct to me to some of the stuff we've been seeing. And even if you consider something like a week ago in Left Brain Thinking, I was discussing Mercado Libre with Brian Dress. That's an online digital marketplace. It's kind of the Amazon, if you will, of South America, etc. And if you believe in those stories, if you believe in the story that's come through the pandemic of, you know, hey, all those companies are going to help people work from home, what people haven't been saying is, hey, if you're going to work more from home, you're going to need more cybersecurity. So to some extent, do you think that cybersecurity has been the story people have been missing?

That's a really salient point, Chuck. I think you can argue that point quite successfully. You know, cybersecurity for us isn't new. We've had this as a topic to tee up for months. And really, if you think about the work from home, that's just a recent catalyst, but really the conditions have been in place for cybersecurity almost since Y2K. You know, it's personal at home and corporation and governments really have been reworking data workflows and everything else to be digital. When things are digital, you have to secure them, and you have to secure them differently. It's one thing for them to go digital and be in-house and on location, and it's another thing for them to be digital and online and out of your control. And it's quite something else when now a lot of corporations are bring your own device. Cybersecurity, it's always been an important issue, But obviously COVID and work from home has become an accelerant. And in light of this SolarWinds breach, you bet you every government and every corporation will be redoubling their efforts because however amount they spent on cybersecurity and however well they thought they were protected, it's pretty obvious that they have not been.

Let's talk about one cybersecurity stock. Again, we've got the Fortune Maker series of people want to hear about different stock picks. That's where they want to go. That's January 7th. But today, let's talk about one of the cybersecurity stocks that kind of stands out to you as one of those names that maybe people haven't been thinking about that they should be.

One of the things that stuck out to us in light of the SolarWinds breach is just how pervasive these breaches have become and how if your technology stack, if one part of it, particularly a core part of your stack, is compromised, how that opens every part of your organization up to breaches of data and compromises. And a name that we like in the space, one of the things that you're going to have to do is assess your risk or to think about how threat or how vulnerable am I. And with more devices coming and more people working from home with more ground to cover, we think a name in the space that's a leader in this visibility space for cyber exposure is Tenable. The ticker is TENB. It's a $5 billion market cap. It's just at this point where it hasn't reached a billion yet in revenue. The revenues are growing at 25+ percent per year, and they have just reached profitability. So we think Tenable is a name in a space at the right time. And it has all the metrics in place to do really well over the next couple of years.

The one thing we know about cybersecurity stocks, they are volatile on the upside, right? I talked about how some of them are up 30% just in the last month, and more than a few are up 70% this year. Do you worry about the downside risk, that there's going to be any sort of backlash, or that they're going to ride out any downturn and maybe be more volatile on the downside. Is there anything that people should be considering about volatility in stocks that are this hot?

I think you have to pay attention to what stocks and why they're hot. A lot of times stocks are up a lot for a reason. There's a lot of excitement around the product or service, or it's shown to have been a profitable way to go. So not everything that goes up ends in some sort of speculative mania. And in this case with Tenable, the reason that we say there's a long way to go, it serves about 30,000 customers right now, but only half of the Fortune 500 companies right now buys its products or service, and only 30% of the Global 2000. And if we think about the market share, Tenable is the leader in the vulnerability market space. And we think the business model, it's 94% of their revenue is recurring in nature. And they're also profitable. So if you think about stocks that are up a lot, could the stocks come down a little bit? Yes. But as business fundamentals go, the momentum is to the upside with Tenable. It's about a $16 billion market opportunity for total addressable market that's growing by double digits every year, and it's accelerating. And the need for its products and services has increased, and we think margins are gonna grow as well because a lot of this business is going online, so margins are gonna grow. So yes, there may be some downside in the share price temporarily, but over the next couple of years, I think investors will do very well in this name.

Is this a case where you wanna play just the stock? Where you're interested in any bonds? How do you feel about both sides of this?

In this case, There is no opportunity on the bond side. There's no debt on the balance sheet of Tenable. So here's a clean story. Investors can just buy the stock. The valuation isn't, in our opinion, very pricey. It trades at about 12 times forward sales. To put that into perspective, there's a lot of businesses that we've evaluated here lately in the healthcare space, which grow at 7 to 8% per year. With much lower margins that are trading at 12 times forward sales. And here's a business that's growing at 25% plus a year. Its margins are expanding. Its market opportunity is growing 12 to 13% per year, and it's a leader in the space. So again, next couple years, we think investors should do very, very well in cybersecurity in general. But specifically Tenable Holdings.

And for those reasons, Tenable Holdings, ticker TENB. There's much more to come on cybersecurity if you attend that Fortune Makers Series event January 7th. Again, you can get more information at leftbrainir.com. Nolan Langford, happy New Year. We'll talk to you again in 2021 and check you out, of course, at that Fortune Makers event.

Absolutely. Have a happy new year, stay safe, and we look forward to continuing the series.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn more about my weekday podcast at moneylifeshow.com. Thanks to Nolan Langford, my guest, the Chief Executive Officer at Left Brain Investment Research. Learn more about the firm and its analysis at leftbrainir.com and go there for information on the January 7th Fortune Makers series on cybersecurity stocks. The firm's on Twitter @leftbrainir. Left Brain Thinking is available every Wednesday. Please subscribe on your favorite podcast app and plan to put your left brain thinking cap on every week. Until then, have a great New Year's celebration. We'll see you again next week.