SecureWorks Stock: A Great Risk-to-Reward Opportunity with 60% Upside

SecureWorks Stock
iStock.com/Sitthiphong

Big Gains Ahead for SecureWorks

The demand for cybersecurity solutions is never-ending, as the threat of malicious attacks from domestic and foreign entities continues to be prevalent. We constantly hear about the major data breaches at major U.S. companies and government agencies, and the problem will likely worsen as the abilities of hackers improve.

The cybersecurity segment is competitive and full of participants advancing their solutions. In the small-cap space, an intriguing player is SecureWorks Corp (NASDAQ:SCWX), which is down 20% over the past year and ripe for a buying opportunity for aggressive risk capital.

SCWX stock is undergoing some current troubles, trading well off of its high of $16.23 in June 2016. But revenues are rising and SecureWorks is heading toward profitability, which offers a bull thesis for picking up shares of SCWX stock.

SecureWorks provides its “SecureWorks Counter Threat Platform” used to protect intellectual property from external invasion. The company counts over 4,400 clients of its subscription service in 61 countries.

At the current price, SCWX stock is a decent risk-for-reward trade with limited downside risk, which I will discuss later.

Improving Fundamentals with SCWX Stock

The key for SecureWorks is its need to deliver consistent growth and profitably. If the company can accomplish this, there would be reason to expect strong price appreciation for SCWX stock.

The two-year compound annual growth rate (CAGR) for SecureWorks revenue is a healthy 29%, with revenue coming in at $429.5 million in FY17.

The concern is that the revenue growth rate is slated to fall to eight percent (to $464.7 million) in FY18 and go to 9.9% (to $510.6 million) in FY19. (Source: “SecureWorks Corp. (SCWX),” Yahoo! Finance, last accessed December 1, 2017)

The expected decline in the revenue growth rate is not ideal for SecureWorks, but the fact is, it’s not that uncommon for smaller companies to see growth normalize or pause after the initial push in growth, which I believe is the situation with SCWX.

What is encouraging is that SecureWorks has managed to expand its gross margins from 45% in FY16 to over 50% in FY17.

The improvement in margins will inevitably lead to profitability. SecureWorks could see its loss fall to $0.05 per diluted share in FY19, and see profits in FY20.

Analyst Take:

The stock chart for SecureWorks shows the breakdown from the $12.50 level after trading at over $16.00 in June 2016.

SCWX stock chart

Chart courtesy of StockCharts.com

SCWX stock made two attempts to rally but failed to hold in each case. If SecureWorks can deliver improved results and, if the market holds up, we could see SCWX stock take a run at $12.00 and eventually toward $14.00–$16.00, implying a potential gain of 60%.

The downside risk is around the $8.50 level, representing a risk of about 14%. Given this risk-to-reward profile, SecureWorks is worth a closer look.