<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
SIMON BROWN: I\u2019m chatting now with Keith McLachlan. You\u2019ll him of course at Element Investment Managers. Keith, appreciate the early morning time. CrowdStrike AA \u2013 CrowdStrike has been my cybersecurity stock of choice. I bought it almost exactly three years ago. Back then it was $40; it\u2019s now $220. So I\u2019m a happy man about that. Less happy, perhaps, 30\u00a0times price-to-sales, 5% stock-based compensation.<\/p>\n
You and I have spoken about stock-based compensation before. It\u2019s immensely expensive, the short answer. It\u2019s just expensive, which got me thinking there\u2019s something else out there.<\/p>\n
You and I have chatted before. You have different angles on the cybersecurity, different stocks in your in your quiver. What\u2019s your thinking around the space?<\/p>\n
KEITH McLACHLAN: Absolutely. Morning, Simon. Perhaps stand back and the sectoral\u00a0view here is really simple. More and more of the economy and our lives are shifting digital. And that means that there is more potential attack surface and more at risk, and therefore not just is the information technology growing faster than GDP, but in fact, ICT, the security of that data, that access \u2013 and everything growing faster.<\/p>\n
It\u2019s an incredibly resilient and long-term tailwind in the sector. So there are some really great growth stories from \u2013 and you touched on them \u2013 a CrowdStrike, Palo Alto, Zscaler, Fortinet.<\/p>\n
All of them are top tier, really good growing vectors in the global markets. Locally, we have Datatec. And then don\u2019t forget Microsoft has got a division of it.<\/p>\n
Read:
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But all of them, great top-line growth stories. Here\u2019s the thing \u2013 not all of them are great bottom-line growth stories. Some of these companies are basically, in my slightly jaded opinion, actually listed compensation schemes that exist to make the employees and the insiders rich, but shareholders get absolutely nothing.<\/p>\n
CrowdStrike \u2013 you touched on the share-based compensation, which is really part of the payroll, and instead of paying cash for a salary, for some of your salary I\u2019m going to give you shares, which is even more expensive than cash, because they tend to linger around.<\/p>\n
And CrowdStrike, 21% of its revenue is share-based compensation. Is that a lot or a little? Well, it\u2019s really part of payroll; 80% of its free cash flow is, and in fact, almost 100% of its profits \u2013 80%, 87%, rounded up to 90%.<\/p>\n
Read:
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AI boom a boost for Datatec<\/p>\n
SIMON BROWN: Yes.<\/p>\n
KEITH McLACHLAN: So really, Zscaler is even more toxic, where 120% of its profit is share-based compensation, shareholders getting absolutely nothing. So you\u2019re taking all the risk, but you\u2019re getting nothing, none of the economic benefits are flowing to you as a shareholder.<\/p>\n
And if a valuation is nothing more than expected future cash flows attributable to you, are these things really worth anything?<\/p>\n
That\u2019s where I think Fortinet stands out as the gold standard, where they\u2019ve got really, really beautiful, beautiful economics, and it does flow to the shareholders.<\/p>\n
SIMON BROWN: And that\u2019s the point. To be clear, the share price is up, so I\u2019m a happy shareholder, but of course ultimately there needs to be something underpinning that. And that\u2019s what\u2019s missing there. I\u2019m assuming Fortinet which you suggest \u2013 they\u2019re in the space but not sort of paying everything back to staff. They\u2019re actually giving some real return and some real growth to shareholders.<\/p>\n
And it is a stock \u2013 I\u2019m pulling up the chart \u2013 that\u2019s doing excellently well as well.<\/p>\n
KEITH McLACHLAN: Absolutely. Fortinet, you look at those ratios, and about 14-15% of free cash flow and profits is paid in share-based compensation, which means that you\u2019re getting the majority of it and all is in there, because in a controlled basis share-based compensation aligns employees with the outcome that shareholders are getting. That is a good thing, that\u2019s not a bad thing.<\/p>\n
But abused to the maximum, it just means that shareholders get nothing and employees get all of the upside but none of the downside.<\/p>\n
Fortinet has a beautiful balance, and it\u2019s because its founder still runs it and still has a large equity position; so he\u2019s actually aligned with the rest of us. Really strong free cash flows.<\/p>\n
Read:
How to sell your company, and keep it
Buffett, and why you need to eat with management<\/p>\n
All of these guys \u2013 we can get sucked into the slightly different business models and where they\u2019re positioned in terms of the IT\u00a0security market, but ultimately, if you\u2019re not getting the benefits, it doesn\u2019t matter. And with Fortinet, you really are. Those benefits are accruing to the shareholders, and it\u2019s reflected in reasonable valuations. Somewhat expensive. You\u2019re going to be hard-pressed to find cheap in this market.<\/p>\n
But that\u2019s really a symptom \u2013 that\u2019s such a long-term, resilient, inelastic tailwind IT security in that all of these companies are growing at high double digits, and expected to continue growing for years like that.<\/p>\n
SIMON BROWN: Yes, absolutely. And to be clear, Fortinet, I\u2019ve got an EV\/Sales [enterprise vale-to-sales] here for the current financial year of around 16; that compares with 40 on CrowdStrike. To your point, there\u2019s no cheap here, but there is certainly relative, and I think that\u2019s perhaps that\u2019s what we\u2019re looking for.<\/p>\n
We\u2019ll leave it there. Keith McLachlan from Element Investment Managers, appreciate the early morning time.<\/p>\n
#Whats #cybersecurity #stock #choice<\/p>\n","protected":false},"excerpt":{"rendered":"
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