Mimecast Ltd. (MIME, Financial) is an established cybersecurity company with a strong focus on email. The company, which was founded in 2003 by Peter Bauer and Neil Murray, went public in 2015. Since then, the share price has been on a meteoric rise, increasing by 685% over the period. The share price doubled in 2021 as it recently agreed to be acquired by private equity company Permira for $5.8 billion in cash, or $80 per share, which is close to where the stock trades currently.
Let's dive into the business model, financials and valuation to see if the stock still offers good value.
Email hacking threat
Email hacks and various cyber scams are a serious threat to businesses and private information globally. In 2013, cyber criminals hacked Yahoo’s 3 billion email accounts, gaining access to sensitive customer information. Then in 2015, a Russia-based cyber-attack group stole email and password combinations for over 117 million LinkedIn accounts. Around the same time, Mimecast went public, giving it the opportunity to enforce its mission to make “email safe for business.” Email hacks are still commonplace and no company is safe. In March 2021, Meta Platforms' (FB, Financial) Facebook saw 533 million user records stolen via “scraping” due to a vulnerability on the platform.
Thus, the need for email protection is a real pain point for companies as, according to IT security consulting company PurpleSec, email compromises cost, on average, $24,439 per case. In addition, the volume of email fraud that organizations receive has increased 8% year over year. Around 66% of malware is installed via malicious email attachments.
“Cryptojacking” is also a popular trend where hackers can use phishing techniques to get someone to click a malicious email link, which then loads crypto mining code onto their computer.
With the rising price of cryptocurrency, this has caused these type of attacks to increase in popularity from 66,000 cases in 2020 to 436,000 in the UK alone, according to data from SonicWall. Some better known corporate cases of this include issues at Tesla (TSLA, Financial), Starbucks (SBUX, Financial) and even the San Diego Zoo.
Thus, Mimecast, with its mission to “make email safe for business,” is expected to benefit from these tailwinds. In addition, the company has expanded its product range to include security awareness training, enterprise data loss protection, digital risk protection, secure web gateway and backup/recovery software. This has allowed the company to increase its total addressable market from $11.7 billion at the time of its initial public offering to $25.4 billion currently.
Source: Mimecast presentation.
Business model
Mimecast operates with a software-as-a-service model, which protects email via three zones. The first is the email perimeter (Zone 1) , the second is inside the network (Zone 2) and beyond the perimeter (Zone 3).
Source: Mimecast presentation.
Today, it has over 36,100 customers in more than 100 countries, over 1,700 employees and 337 billion emails under management. The company offers renewable annual subscriptions and customers can even purchase multiyear contracts. This has led to a high retention rate of 108% as of third-quarter 2022 after a downsell of 7% and a 115% upsell.
Exceptional financials
Revenue jumped 17% from $426 million for full-year 2020 to $501 million in fiscal 2021. The gross profit grew over 19% to $379 million in the same period. This is an extremely high SaaS margin of 75%. Net income also increased substantially from a $2.2 million loss in 2020 to a $29 million profit in 2021.
In the most recent earnings release for the third quarter of 2022, the average order value per customer grew 15% year over year to $15,200. The number of services per customer increased to 3.9, up from 3.5 in the prior-year quarter.
In terms of valuation, the GF Value Line indicates the stock is significantly overvalued after the recent doubling in share price on the aforementioned takeover deal, which is expected to close in the first half of this year.
Final thoughts
Mimecast is an incredible company with high revenue growth, high margins and very strong tailwinds in the email security market. However, the stock is now significantly overvalued due to the takeover announcement by Primera. All eyes will be on this deal, which looks as if it will close.
