ForeScout Technologies Outperforming the Nasdaq
For those looking for a small-cap cybersecurity trade that could return some strong alpha over the longer term, consider Forescout Technologies Inc (NASDAQ:FSCT).
FSCT stock debuted at $22.00 in its initial public offering (IPO) in October 2017 and traded as high as $37.79 on March 12, 2018. While the easy money may have been made, ForeScout stock could still provide some above-average returns for patient investors.
ForeScout develops advanced enterprise security software used to monitor and manage corporate networks from all access points including mobile, the Internet of Things, and the cloud. The strong demand for these solutions will provide the tailwinds for ForeScout to ramp up its revenues and eventually turn a profit.
The company’s solutions are used by over 2,500 customers in over 70 countries.
My Bull Case for FSCT Stock
Revenues have been growing for ForeScout over the past three years, which is what you want to see from companies beginning to ramp up.
|Year||Revenue (Millions)||% Change|
The compound annual growth rate for revenues from 2014 to 2017 was a hearty 45.9%, including a consensus beat in 2017.
ForeScout is estimated to continue growing revenues, albeit at a slower and more normalized growth rate.
Revenues are set to increase 21.6% to $268.52 million in 2018 followed by growth of 19.9% to $321.9 million in 2019. (Source: “ForeScout Technologies, Inc. (FSCT),” Yahoo! Finance, last accessed April 19, 2018.)
But while ForeScout is managing to grow its revenue base, the company is still a few years from being a profitable company.
ForeScout is burning cash to grow the company, but with a net $164.0 million in cash on the balance sheet, the need for new financing should not be a problem for the time being.
After coming off an adjusted loss of $4.20 per diluted share in 2017, FSCT is estimated to narrow its loss to $1.10 per diluted share this year and down to as low as $0.23 per diluted share in 2019. ForeScout could see profits in 2020.
A glance at the Free Cash Flow (FCF) showed –$7.25 million in 2017, but it was a vast improvement over 2016.
Free Cash Flow
|Year||Free Cash Flow (Millions)|
The fact that ForeScout is steadily increasing revenues, cutting its losses, and improving the FCF picture bodes well for the FSCT stock price going forward.
The chart shows FSCT stock at just south of its post-IPO high and eyeing a breakout at around $38.00. The trendline is holding for ForeScout stock at just above the key 50-day moving average, which also serves as the bottom channel support.
Chart courtesy of StockCharts.com
While a breakout for FSCT stock will drive the price toward $40.00, the actual upside target will depend on how well ForeScout performs over the next few years. If FSCT delivers strong numbers and the stock market holds, a move to above $50.00 would be likely.