Rubrik report 1Q24

Comment:

The company continues to achieve strong results in revenue growth and customer base expansion despite a challenging macroeconomic environment. Demand for Rubrik solutions is on the rise. Management forecasts further growth in financial metrics, which correlates with market increases in ratings and target prices for the company's stock. We continue to see high investment potential in this security.

However, we note several risks:

• The cybersecurity sector is experiencing rapidly growing competition, and stocks in this sector exhibit high volatility;
• The company is unprofitable, and achieving profitability may take more than two years, affecting the investment timeline.

The company has released its first impressive quarterly results for Q1 2025, which exceeded analysts' expectations (in comparison to Q1 2024):

• Total revenue: +38.0% YoY, reaching $187.3 million against a forecast of $171.29 million (a $15.91 million increase);
• Subscription revenue: +59% ($172.2 million vs. $108.4 million).
• Gross profit: +1.78% (74.87% compared to 73.56%), excluding stock-based compensation expenses;
• Earnings per share (EPS), excluding GAAP: -$1.58, compared to the forecasted -$1.73.
• Annual recurring revenue from subscriptions (ARR): +46% YoY, reaching $856.1 million as of April 30, 2024. Source: sec.gov

As Rubrik is a growth company (and currently unprofitable), the leading indicators of business development are the dynamics of gross income (where we see strong growth) and the dynamics of acquiring new users on the platform and retaining them. The company demonstrates success in this metric by showing growth in subscription ARR:

Over three years (from the 1 quarter of 2022), the ARR for the company's platform subscriptions has increased 5.6 times (from $153 million to $856 million), which represents an impressive annual growth rate (CAGR) of 77.53%.

*Market Opportunities: The total addressable market (TAM) is estimated to reach $53 billion by 2027, offering significant growth opportunities.

Net ARR from new subscriptions increased by 32% compared to the same period last year to $72.0 million, driven by an increase in large transactions.

Unlike many corporate software developers, Rubrik continues to demonstrate a high growth rate in the number of customers with an ARR subscription over $100,000. This strongly indicates the company’s rapid market penetration and growing demand for its products. The growth in ARR from subscriptions of 100K+ over the last 12 months was 41.5%:

Despite the high revenue growth, the company's stock price fell after publishing the earnings report. The reason was high operational losses ($724 million compared to $84 million YoY). High expenses always put pressure on stock prices. However, this is likely a temporary concern, as the main expense was stock-based compensation (incentives to attract and retain top talent within the company) amounting to $640 million for the quarter, which led to huge losses. This is a fairly common practice among most companies that have gone public. In the future, this expense item typically does not have a strong impact on the overall financial picture.

Financial Stability

We observe that the cash flow from operating activities (*a measure of cash burn related to the company's core operations) was only $31.4 million for the quarter (see above). Liquid assets (cash and short-term investments) according to the report total $606.3 million. Consequently, the Runway (the rate of cash burn based on operational losses) spans 19 quarters (4.8 years).

Furthermore, the company maintains a gross profit margin of 75%, which could provide a reliable financial lever with the high growth rates of ARR anticipated in the future.

Valuation

Based on the Price to Sales (P/S) ratio, the company (6.7) is valued below the median for the software sector (10.80):

From the perspective of future cash flows (DCF model), the company's shares are currently trading 39.3% below their fair value (implying a potential growth of 65%):

Forecasts

The company's financial forecast for the fiscal year 2025 surpassed consensus estimates.

• The company expects losses in the second quarter between 50 to 48 cents per share, compared to market estimates of 50 cents per share;
• Revenue is projected to be between $195 to $197 million, against the estimate of $194.89 million;
• The company forecasts ARR for the entire year 2025 to be $990 million, compared to the estimate of $959.5 million (an approximate growth of 26%):

Price Forecasts

The information landscape shows a positive trend reflecting future market expectations. Since its IPO, Rubrik has received overwhelming ratings support from major banks and financial institutions:

After the earnings report, the forecasts have further improved:

• Keybanc raised its price target from $46 to $48, highlighting the company's strong position in the backup and recovery market and its expanding data security platform. Keybanc expects Rubrik to capture a larger market share due to the necessity of ensuring cyber resilience and the urgency for enterprises to transition from outdated systems amid rising ransomware threats.

• Truist Securities also initiated coverage of Rubrik's stock with a "Buy" rating and a target price of $43. Truist praised Rubrik's Zero Trust data security strategy for robust protection against cyber threats and disruptions. The firm is optimistic about the transition to software as a service and forecasts revenue growth of at least 40% by the fiscal year 2026

• Goldman Sachs reaffirmed its «Buy» recommendation with a target price of $48, emphasizing high ARR and profitability metrics. Despite potential sector challenges, the company is poised for over 20% ARR growth and improved operational profitability.

• Barclays raised its price target for Rubrik's stock from $41 to $42.

Rubrik Security Cloud Ratings Overview by Gartner Peer Insights:

Source

Future Growth Triggers

• The development of AI technologies that underpin data creates new security risks, increasing demand for the Rubrik Zero Trust Data Security platform. This platform is a recognized leader in helping clients manage and protect business-critical data.

• Partnerships: Collaborations with industry leaders like CrowdStrike and Kyndryl can expand Rubrik’s strategic product offerings and market reach, potentially boosting investor confidence and stock growth.

• Innovation and Recognition: Rubrik's focus on innovation, including the use of AI in its products, has garnered industry recognition and awards. For the fourth consecutive year, Rubrik received two Global InfoSec Awards at the RSA Conference for “Pioneering Data Security Posture Management (DSPM)" and "Pioneering Cyber Resilience". [Source] (https://www.businesswire.com/news/home/20240506430092/en/);

• Microsoft Partnership: As a Microsoft partner, Rubrik offers Microsoft 365 backup storage as an option for the largest joint customers, with Rubrik Data Protection for Microsoft 365 backup storage.

Disclaimer: “The use of the trademark is for informational purposes only and does not imply endorsement or affiliation. Additionally, the information in this communication is for informational purposes only and is neither an offer to purchase, nor a solicitation of an offer to sell, subscribe for or buy any securities.”