The global cybersecurity market is forecasted to grow at a rapid 13.4% compounded annual growth rate (CAGR) between 2022 and 2029, reaching $376 billion by the end of the period according to a study by Fortune Business Insights. This makes the cybersecurity market an attractive place to invest for tech-savvy growth investors.
One of my favorite stocks in this sector is Telos Corp. (TLS, Financial). Telos was founded way back in 1969 but didn’t go public until 2020. Let’s dive into the business model, financials and valuation to see why I believe this stock could be undervalued after the recent decline in share price.
Business model
Telos is a leading cybersecurity company which focuses on cyber consultancy and solutions. Their customers include Fortune 500 companies and various U.S. government agencies. These include the U.S. Air Force, Amazon (AMZN, Financial) Web Services, the National Security Agency, the U.S. State Department and the National Geospatial-Intelligence Agency.
Recently, the company was awarded a contract with the U.S. Air Force Academy to upgrade and expand their network infrastructure. The company also scored a partnership with government IT provider Carahsoft to expand their solutions. This is expected to support continued expansion with federal customers.
Telos is most famous for its cybersecurity assessment services, which enable a company to determine its “security posture." Their full services include:
- Consulting
- Penetration testing
- Assessment and compliance
- Engineering and evaluation
- Cybersecurity certifications
An interesting platform the company offers is called “Telos Ghost,” which offers a private virtual network as a service. This allows secure, private and anonymous internet access. This product line is expected to benefit from the increasing popularity of remote working and the increased use of cloud applications by businesses.
Through the company's cyber analytics platform, customers can detect malicious activity in real time. In addition, they can attribute and geolocate malicious cyber activities.
Unlike many other cybersecurity platforms, Telos provides an analytics dashboard that is easy to set up for executives who don't have any technical knowledge.
Financials
For the first quarter of 2022, Telos reported revenue of $50.2 million, down 10% year over year, but above their guidance. This was mainly driven by Secure Networks, which was down 29% due to the winddown of a major program. Excluding this winddown, Secure Network sales were up 19%. Their Security Solutions segment was also up 18%.
Gross profit increased by 30% in the first quarter, driven by margin expansion. Below the line expenses increased by $5.4 million due to an increase in Sales, Marketing, R&D and G&A expenses. Cash flow from operations imrpoved $7.1 million and free cash flow rose $6.4 million.
Telos has a strong balance sheet with $127 million in cash and cash equivalents and virtually no long-term debt. The company recently announced a $50 million share buyback program.
Valuation
In terms of valuation, Telos trades at a price-sales ratio of 2.4. This is lower than both the company's own historic levels and the average for competitors. Below is a comparison of Telos' price-sales ratio to those of peers Crowdstrike (CRWD, Financial) and SentinelOne (S, Financial).
I believe Telos' recent decline in revenue looks to be mostly temporary and due to the winddown of a major program. This is frequently a factor to consider with small-cap stocks. While the stock price has corrected extensively, this could be a case of Mr. Market overreacting to both macro issues and a decline in the company's top line, and given the strength of Telos' business and balance sheet, I think the chances of it bouncing back are high.
