Tense Geopolitical Climate Ideal for Secureworks Stock: 100% Upside

SCWX Stock a Pure-Play Cybersecurity Stock With Big Potential

In my search for beaten-down technology stocks, pure-play cybersecurity company Secureworks Corp (NASDAQ:SCWX) surfaced on my screens. Secureworks stock is down by 59% from its high of $26.89, which was set in September 2021, offering contrarian investors an opportunity.

Secureworks is a pure-play cybersecurity provider that serves clients ranging from small enterprises to Fortune 100 companies in more than 50 countries.

SCWX stock fell to $9.26 on June 16 and rallied by 19% to its current level, which is a decent entry point.

Secureworks Corp Working on Improving its Fundamentals

Secureworks reports in a fiscal year ending on January 28, with its most recently completed fiscal year being 2022.

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Secureworks Corp’s revenues grew in three of the past four fiscal years. However, an issue with the company has been the lack of consistent financial growth. Its revenue of $535.2 million in fiscal 2022 was its lowest since 2019.

Fiscal YearRevenue (Millions)Growth
2018$467.9N/A
2019$518.710.9%
2020$552.86.6%
2021$561.01.5%
2022$535.2-4.6%

(Source: “SecureWorks Corp. Cl A,” MarketWatch, last accessed July 4, 2022.)

The company’s negative revenue-growth trend is expected to continue. Analysts estimate that Secureworks will report a decline in earnings to $481.7 million in 2023 before rebounding by 4.6% to $504.0 million in 2024. (Source: “SecureWorks Corp. (SCWX),” Yahoo! Finance, last accessed July 4, 2022.)

The key for Secureworks stock investors is for the company to deliver consistent growth and profitably. But for the time being, Secureworks Corp is trading at an attractive 1.9 times its consensus 2024 revenue estimate due to the selling. This should provide some downside cushioning.

The company is currently working on delivering consistent revenue growth. However, it also needs to do a better job on the expense side.

Secureworks Corp’s earnings before interest, taxes, depreciation, and amortization (EBITDA) have been negative in four of its last five fiscal years. A positive sign is that the company’s EBITDA loss in 2022 was its second-lowest since 2018.

Fiscal YearEBITDA (Millions)Growth
2018-$27.8N/A
2019-$7.572.9%
2020-$9.2-22.8%
2021$8.8195%
2022-$2.8-132.1%

(Source: MarketWatch, op. cit.)

On the bottom line, while Secureworks Corp reported generally accepted accounting principles (GAAP) earnings-per-share (EPS) losses in the last five consecutive fiscal years, its adjusted profits came in at $0.11 per diluted share in 2022.

Unfortunately, the company’s adjusted losses are estimated to return to $0.66 per diluted share in 2023 and 2024. (Source: Yahoo! Finance, op. cit.)

Fiscal YearDiluted GAAP EPSGrowth
2018-$0.13N/A
2019-$0.48-272.3%
2020-$0.3918.9%
2021-$0.2731.5%
2022-$0.48-78.3%

(Source: MarketWatch, op. cit.)

While Secureworks Corp grapples with earnings losses, it has managed to produce positive free cash flow (FCF) in the last four fiscal years. The company should have time to execute a plan to improve its FCF, given the company’s healthy balance sheet, which includes net cash of $165.0 million.

Fiscal YearFCF (Millions)Growth
2018-$13.0N/A
2019$47.0460.6%
2020$65.839.9%
2021$57.6-12.4%
2022$20.5-64.4%

(Source: MarketWatch, op. cit.)

Secureworks Stock Back to Key Moving Average

As the following chart shows, shares of Secureworks Corp continue to be caught in a death cross. This is a bearish technical crossover pattern that appears when the 50-day moving average breaks below the 200-day moving average.

Chart courtesy of StockCharts.com

SCWX stock has tested channel support and resistance several times since September 2021. This included two recent failed breakouts.

Secureworks stock has recovered to its 50-day moving average. With an improvement in the broader market sentiment, the stock could take back its 200-day moving average of $15.27.

If SCWX stock recovers to its 200-day moving average, we could see a move toward chart congestion between $18.00 and $21.00, followed by $24.00.

Analyst Take

Secureworks stock has relatively strong institutional ownership, with roughly 128 institutions holding a 67.3% stake in the company. Moreover, insiders bought 612,142 shares of Secureworks Corp over the last six months, which is an encouraging sign. (Source: Yahoo! Finance, op. cit.)

Once the company starts to deliver consistent financials, I expect SCWX stockholders will be rewarded. Moreover, given the constant cyberthreat risk worldwide, the bullish tailwinds in the cybersecurity segment should continue.