Varonis (VRNS) is this years very first technology IPO that almost doubled on its first day of trading ( a 86% jump over its listing price to be exact). It is a software vendor that helps companies organize and manage their unstructured and partially-structured data, a fast growing space and one that I have been following for a while. See the following Forbes article for an overview of what they do and an interview with their CEO, Yakov Faitelson.
Its been almost 3 weeks since the IPO debut and its shares are currently trading at $42, or ~90% over the listing price . I wanted to check if this is a stock worth investing in especially given all the buzz around big data , governance and security. I am an avid follower of Dr.Damodharan's blog and used a slightly modified version of his valuation template for this exercise. You are welcome to download the valuation model and use your own assumptions.
Based on the information shared in its S1 filing, Varonis is a NY based firm founded in 2004 with ~ 573 employees worldwide , 80% of which are based in US and Israel. It has been growing more than 30% year over year historically and has significantly increased its customer base over the past 5 years ( from 550 in 2009 to more than 2400 in 2013). It however relies heavily on an indirect sales model leveraging resellers and distributors for generating sales; It is interesting to note that this is not the typical Go To Market approach of software vendors catering to enterprise customers, though it has its own advantages.
As is true with a number of software and technology vendors, Varonis relies heavily on US and Europe - 56% of its revenue is derived from US while 35% is attributed to EMEA (Europe, Middle East and Africa); the remaining 9% comes from rest of the world. Also worth noting is that its maintenance and services revenue which tends to be more profitable is growing slightly faster than its license revenue. Their management expects this to continue which in essence would contribute to better operational margins or EBIT.
Given Varonis's historical performance and customer adoption, I assumed that it would continue growing its revenues at ~ 30% annually for the next 5 years and then gradually decline to a growth rate of 2.65% ( risk free rate) by year 10. Its pre-tax operating margin is assumed to gradually increase to a steady rate of 28% by year 10 ( Well established vendors such as Oracle have pre-tax operating margin's of over 35% , but that might be a stretch for varonis given its reliance on channel sales).
I assumed an effective tax rate of 20% for the next five years gradually increasing to a marginal rate of 35% by year 10. This might be a bit conservative given the low effective tax rates realized by technology firms in recent past, but that probably won't last very long with countries trying to close the loopholes and shore up their tax revenues.
The model capitalizes R&D and operational lease expenses while excluding the cost of employee options from the final valuation. With all the above assumptions and a few more , the fair value of Varonis come to $26.67 or 21% over the listing price. However the current share price of $42 is $13 or 57% over its fair purchase value.
So while I think this is a good company in a good space, its current valuation is more than I am willing to afford. This is not to suggest that its share price would drop any time soon. Valuation and price are 2 completely different conundrums and one doesn't necessarily dictate the other especially in the short term. But if the price were to drop below $25, I think this is worth taking a look at.
Some interesting things to keep in mind. only ~ 20% of the stock is currently listed on the market and existing investors won't be able to participate till the lock up period expires on 8/27/2014 ( another 5+ months). So the demand in the short term might overwhelm the supply sustaining the high price point. Also, there won't be any options traded till a few more days which helps keep bears in check. For a list of all relevant facts , visit the following link on NASDAQ's website.
Its been almost 3 weeks since the IPO debut and its shares are currently trading at $42, or ~90% over the listing price . I wanted to check if this is a stock worth investing in especially given all the buzz around big data , governance and security. I am an avid follower of Dr.Damodharan's blog and used a slightly modified version of his valuation template for this exercise. You are welcome to download the valuation model and use your own assumptions.
Based on the information shared in its S1 filing, Varonis is a NY based firm founded in 2004 with ~ 573 employees worldwide , 80% of which are based in US and Israel. It has been growing more than 30% year over year historically and has significantly increased its customer base over the past 5 years ( from 550 in 2009 to more than 2400 in 2013). It however relies heavily on an indirect sales model leveraging resellers and distributors for generating sales; It is interesting to note that this is not the typical Go To Market approach of software vendors catering to enterprise customers, though it has its own advantages.
As is true with a number of software and technology vendors, Varonis relies heavily on US and Europe - 56% of its revenue is derived from US while 35% is attributed to EMEA (Europe, Middle East and Africa); the remaining 9% comes from rest of the world. Also worth noting is that its maintenance and services revenue which tends to be more profitable is growing slightly faster than its license revenue. Their management expects this to continue which in essence would contribute to better operational margins or EBIT.
Given Varonis's historical performance and customer adoption, I assumed that it would continue growing its revenues at ~ 30% annually for the next 5 years and then gradually decline to a growth rate of 2.65% ( risk free rate) by year 10. Its pre-tax operating margin is assumed to gradually increase to a steady rate of 28% by year 10 ( Well established vendors such as Oracle have pre-tax operating margin's of over 35% , but that might be a stretch for varonis given its reliance on channel sales).
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| Discounted Cash Flow Analysis - Varonis |
The model capitalizes R&D and operational lease expenses while excluding the cost of employee options from the final valuation. With all the above assumptions and a few more , the fair value of Varonis come to $26.67 or 21% over the listing price. However the current share price of $42 is $13 or 57% over its fair purchase value.
So while I think this is a good company in a good space, its current valuation is more than I am willing to afford. This is not to suggest that its share price would drop any time soon. Valuation and price are 2 completely different conundrums and one doesn't necessarily dictate the other especially in the short term. But if the price were to drop below $25, I think this is worth taking a look at.
Some interesting things to keep in mind. only ~ 20% of the stock is currently listed on the market and existing investors won't be able to participate till the lock up period expires on 8/27/2014 ( another 5+ months). So the demand in the short term might overwhelm the supply sustaining the high price point. Also, there won't be any options traded till a few more days which helps keep bears in check. For a list of all relevant facts , visit the following link on NASDAQ's website.
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