TL;DR: Secureworks, $SCWX, a managed cloud and software cybersecurity provider is set to pop hard.
- COVID has been hugely bullish for cybersecurity with growth and earnings beats across the industry. But SCWX is lagging behind other cybersec firms in recovery–down 20% pre-Rona where similar cybersec firms are up 20-50%.
- Announced a partnership program last week to license their software to other companies to provide managed security. Tells me a) they’re so damn busy with new customers transitioning to WFH networks they need to outsource the work, b) SCWX should be priced for growth whereas they were previously the “value” play within cybersecurity.
- Insiders insanely bullish in April. CEO nearly doubled his shares
- High short interest and low float will make them run hard once they start moving up. Short squeeze likely.
SCWX 17.50c 7/17, then sell just before or after June 4th earnings report. Other plays in write up. Start off with a limit order at 20 cents and raise from there if no fill.
I originally posted about SCWX a week ago and they’ve popped up ~15% since then. I’m feeling even more bullish on them now after they announced their partnership news. I deleted the previous post after some big retards must have thrown a market order at these options and more than doubled the price in 15 minutes. Please use limit orders to buy in cheaply.
**Update 3: I hope some of you took my advice to set up stop limits to take profits and made some glorious gains on the opening green dildo. This stock is volatile and some degree of swing trading is the way to go. For those who want to FOMO in, IV is at 100% which is way high. Relax and check later today for it to drop. If it doesn’t. just look for another good play.**
**Update 2: IV is too damn high. Wait until tomorrow to buy in. You’re a lot more likely to be a bagholder at these prices than the 20 cent contracts I originally recommended.*\*
**Update 1: As described in the technicals section below, I’ve sold contracts due to an existing limit order when they were up 100%, still believe strongly in the play though. Additionally, the IV on these is pushing up really hard. Be patient and wait for the IV to go down before buying in while using conservative limit buys. If the price holds over a dollar for these contracts I will close this post to prevent people from blowing money on overpriced contracts.**
|Market cap||$1.06 billion|
|Price at close yesterday (Marketwatch)||$13.28|
|ATH||$23.11, Jan 2019|
|Core product||Managed cloud network security|
|Customers||Include 23% of Fortune 500, 25% of total customers are international|
Let’s hear what they do straight from their latest 10-K filing:
We are a leading global provider of technology-driven information security solutions singularly focused on protecting our customers from cyber attacks. We combine deep experience from service to thousands of customers, machine learning and automation from our proprietary technology, and actionable insights from our team of elite researchers, analysts, and consultants to create a powerful network effect that provides increasingly strong protection for our customers. By aggregating and analyzing data from various sources around the world, we prevent security breaches, detect malicious activity in real time, respond rapidly and predict emerging threats.
Our vision is to be the essential cybersecurity company for a digitally connected world. Through our vendor-neutral approach, we create integrated and comprehensive solutions by proactively managing the collection of “point” products deployed by our customers to address specific security issues and provide supplemental solutions where gaps exist in our customers’ defenses. We seek to provide the right level of security for each customer’s unique situation, which evolves as the customer’s organization grows and changes.
We have pioneered an integrated approach that delivers a broad portfolio of information security solutions to organizations of varying size and complexity. Our flexible and scalable solutions support the evolving needs of the largest, most sophisticated enterprises staffed with in-house security experts, as well as small and medium-sized businesses and government agencies with limited in-house capabilities and resources.
The two keys here are managed and portfolio.
Unlike most of their competition, SCWX manages the security software they sell. As part of the subscription price of the software, you pay for a SCWX security professional to monitor your suspicious logs in real time and investigate/communicate when they see a pattern consistent with an attack. Customers can also pay retainers for responses to potential breaches, so that when an attack is detected a team of SCWX professionals on standby will try to quickly shut the attack down and determine the extent of the damage. Along with managed security, they sell training, consultation, and testing for a company’s security network. Additionally, SCWX has recently launched a SaaS platform that allows customers to use their software without purchasing management solutions which will help them grow even more among more price-sensitive and tech-savvy segments.
Managed security should be even more bullish than unmanaged security during this pandemic. Companies that could manage their own security (i.e. tech and very large) already do and only needed to secure more devices. Whereas companies/government agencies/educational institutions that aren’t capable of fielding a team of cybersecurity experts have suddenly found themselves in need of network security for their work from home (WFH) staff and the websites that drive 100% of their present income. These groups now suddenly need to pay someone to set up and manage cybersecurity that they were unprepared to manage themselves. In the past few years analysts have been less bullish on managed security companies for two reasons: higher costs (i.e. staff) and less growth potential (can’t just add more servers and run the same code base). I think the pandemic changes some of that however, because SCWX has the badly needed security professionals which are in short supply.
Security should never be thought of as a collection of individual tasks/actions, but as a system, because any one vulnerability can fuck up everything. Unlike competitors that focus on apps for solving particular problems, SCWX offers a comprehensive security solution. They offer suspicious activity detection and response, network security, endpoint security, malware/spyware detection and response, log management, firewall management, and other security features. Having an ecosystem of products helps them to tailor solutions to protect their clients from any of the variety of threats that they may face. If you’ve read Black Swan/Antifragile, then you know that antifragility comes from systems thinking and managing your environment holistically.
Peers: software and cloud cybersecurity firms are hitting new all time highs
SCWX should be trading at February prices at a minimum. Cybersecurity is hot right now. Amid the international distrust of pandemic, there have been many hacking attempts targeting new work-from-home networks, hospitals, biotechs, educational institutions, and government systems.
Additionally, SCWX has partnerships with CRWD and QLYS for endpoint security and vulnerability management respectively and it should be participating more heavily in their upside.
NET, AKAM, and QLYS have all reported earnings in the last month. Their share prices spiked 10% in the week before their respective reports. They beat earnings slightly and then dumped off most of the gains to recover them a week or two later. Given both the trend of cybersecurity earnings beats and SCWX’s own steady growth, I think a massive earnings beat is likely compared to the analysts’ low expectations.
Unlike it’s competitors, SCWX is priced cheaply compared to their assets, at 7.5x cheaper than the median of the sample below. Even if you only want to buy shares, SCWX is a fantastic deal for picking up cloud cybersecurity assets compared to it’s peer group.
|Ticker||Price to book value|
Partnership program announcement
Article. Last week, SCWX announced a program so that other companies can license their software to build and sell managed security solutions. While their price jumped nearly 10% after the announcement, I don’t think the implications have been fully realized.
- Against the common criticism of managed security as low growth, SCWX is now poised for massive expansion. Now other companies can target niche markets (region, sector, pricing, government, etc), while SCWX can focus on their core competencies. Letting specialized security companies handle clients with particular needs will cut some of their work bloat and stay efficient as a company. SCWX should start to approach the valuations of the cloud and SaaS security companies now that they can act like a managed security company without doing the managing.
- THEY’RE GODDAMNED BUSY RIGHT NOW. If their own security professionals were only half-busy right now, they wouldn’t make this sort of announcement because it would undercut their own productivity/profitability. But if SCWX is swamped with new clients and with old clients who need more work done, then they would need to find ways to unload their work profitably. Partnership allows them to quickly add clients to their roster by pairing them with vetted security firms that don’t have the same software base as SCWX.
Massive amounts of insider buying
In the last month, insiders, mainly the CEO, bought more stock than they did in the rest of last year. I’m betting that they’re doing brisk business and they think the stock is undervalued at current prices.
Potential short squeeze
Nominally, the class A stock has a float (shares available to public, i.e. not insiders or index funds) of 63% and 15% short interest. That level of short interest is on the low end of the right range where short squeezes are common.
Most of the company’s value, however, is locked up in class B stock held exclusively by Dell (12.12MM class A shares, 70MM class B shares). The real float of the company is closer to 11.7%. Low float is generally indicative of an extremely volatile share price. If SCWX picks up momentum, it will move up quickly as the short holders get squeezed and few market participants are able to sell.
Additionally, 25% of all class A shares are held by insiders and 62% are held by institutional investors; which is a bullish breakdown that implies knowledgeable folks are holding.
I don’t believe in magic crayon bollocks, but I want to draw attention to yesterday’s trading which was the fairly wild for SCWX. Below we see a gap up, followed by a momentum algo pile-on or short squeeze to a two month high, a retest of last week’s close, and then consolidation at +5%. Due to the volatility of SCWX on up days like yesterday, this trade will be most rewarding to traders who either actively check the charts or set profit-taking limit sells (like I do).
I think there’s a legit possibility that this trade could be a ten-bagger, but I have set half my contracts to sell with a stop-limit order when they are up 100% so that I can take make my remaining contracts “free” without having to follow the chart all day. If that order executes, I’ll probably set my next stop-limit order for a more outrageous amount like +300-500%, or I will follow the timeline below.
Q1 earnings for SCWX are going to be reported pre-market on June 4th. I expect a big run-up before then as other cybersecurity firms report high earnings and continue to be bid up. I hope the stock is up high enough that I can sell June 3rd at a big profit. If the stock moves up, but dip right before earnings, then I’ll hold through earnings and sell just after at either a profit or a loss. I have TP hands (it happens when you watch 4/17 SPY puts go from +300% to -90%) and will take some profit/cut some losses early depending on how the trade goes.
I recommend the 7/17 17.50 call option for a couple of reasons:
- Most liquid call option in the entire chain with OI > 300. The bid-ask is still as wide as your wife’s pussy, so be careful with your orders. You can also do the 15c and 20c contracts for more/less risk, but there is less OI. The June contracts are more “on thesis,” but OI is less than 30 and I never buy contracts with that low of volume. [Edit: bid-ask has narrowed substantially since posting.]
- I want a lot of gamma because I think the share price is going to make big swings in the next few days. The 17.50c offers the right amount of leverage for my taste.
- I think there is a solid chance (~30%) they will become ATM or higher by earnings.
- Protection from theta gang. There will still be over a month of time value on these bad boys after earnings, while we’re only holding for a week.
Again, there’s some other interesting options in the chain, you can also do spreads to lower cost basis, or you can sell covered calls to profit off the same move and make money off autists YOLOing into these contracts.
Below is the payout table I calculated for the 17.50c option. Note that 50 cents might not be the best available price, if you pay too much you’ll take an immediate loss. And if you get in cheaper, growth potential is even higher. I did not take into account the pre-earnings IV pump which should act in your favor.
Risks for this play:
- The market is efficient and SCWX is correctly priced.
- Managed security does not attract more customers due to expense or inability to support additional customers.
- Existing customers too cash-strapped to buy more security infrastructure.
- During last earnings call, March 27th, SCWX gave guidance for lower earnings next quarter due to pandemic. (But that was when everyone was still freaking the fuck out and reported earnings were only to end of February.)
- Rug pull on entire market.
- Burned on bid-ask spread.
- CRWD and OKTA miss earnings (later this week).
- Fuckery by Dell related to the class B shares.
- Pretty much any risk listed in the SCWX 10-K.
Disclaimer: I am not your financial advisor. Take anything you read on this retard sub with a grain of salt. The information here is reliable to my knowledge, but I cannot guarantee its accuracy. Do your own DD.