The Case For Cognyte Software (CGNT)

A security analytics software firm with an already well established customer base will continue to grow based on increasing demand for their service and a transition to a SaaS model.

Company Overview

Market cap at publishing: $1.77B

Price at publishing: $26.86

Cognyte Software is a global leader in security analytics software. They provide services to governments and enterprises worldwide. The company's open software is used to successfully identify, neutralize, and prevent national security, personal safety, business continuity, and cyber threats. They have over a thousand governmental and private clients. Cognyte Software was incorporated in 2020 as a spinoff of one of Verint’s business units and is headquartered in Herzliya, Israel.

CGNT Financials

The company was just spun off in March 2021 so there won’t be any in-depth analysis on their financials or growth. I prefer not to compare the current stand-alone company with the past when they were still part of Verint as I believe they will do much better now as a separate entity and it won’t be fair. Most of the in-depth analysis will be done on the stock price and how it compares to the rest of the industry. However, here are some financial highlights from their latest filing:

Cognyte growth taken from their presentation

Solid growth in the double digits across many metrics
Profitable with earnings of $14.2M for 2020
Solid balance sheet includes $54M in cash and $285M in equity
Positive annualized free cash flow of $103M for 2020

The $CGNT Stock, I Like It

CGNT which is currently trading at $26.86 has a market cap of $1.7B. The stock is down 3% since its inception and is still 24% off its 52 week high of $33.37. I am comparing them with two other analytical software firms, Palantir and Fireye. Palantir is more of a general software firm that processes data across many industries while Fireye focuses on security like Cognyte.

Comparing Cognyte stock to Palantir and FireEye

You’re not seeing things, Cognyte Software is highly undervalued compared to its peers. Yes, it appears Palantir is overvalued but maybe it’s not, after all, Palantir’s price has been steady for almost a year now. My point is that if Palantir is fairly valued or even close to it then the price of Cognyte Software should be $137.93!. That would be nice but let’s not get ahead of ourselves, it’s more likely that Palantir is overvalued than fairly valued. However, even compared against its closely related peer FireEye, Cognyte still looks cheap. Even more so when you consider that Cognyte is actually profitable and neither FireEye nor Palantir are and FireEye has a higher D/E ratio.

CGNT Stock Outlook

I think Cognyte Software is in a fantastic position to grow based on several factors including:

They have a large customer base of over 1000 clients, 87% of which are governments who always pay their bills on time and like to stick to something when it works
Over two decades of experience providing a complicated service with a high barrier to entry
The ever-growing complexity of cyberattacks will demand more complex solutions like those provided by Cognyte
Their transition to a SaaS business model is going well as recurring revenue is already up 17% YoY
They are Israeli and those guys are smart with computers and stuff
Their commitment to tackling the challenge of successfully investigating "internet money" transactions

C’mon, did you think I wasn’t going to throw in a picture of an internet money coin and not say the big “c” word? This company is a buy based on this image alone. /s

Entering an interesting market that shall not be named here

$CGNT Stock Valuation

I use Damodaran’s DCF analysis using free cash flow to firm to come up with a valuation. Here are the assumptions I made about future cash flows and all other inputs. Sorry, I know it’s not the prettiest but there is a method to my madness. The present value I get from my analysis is $2.9B or $44.87/share which, compared to the current price would represent a discount of 70%.

Cognyte DCF analysis

CGNT Stock Price Target

I have a price target of $44.87 on Cognyte Software.

TL;DR: Good company making smart decisions in a great industry that will undoubtedly continue to grow over the years.

My position

I have not initiated a position in any companies mentioned in this article however, I may purchase shares within the next 72 hours.

Disclaimer

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