Cybersecurity stocks are highly volatile, with the best of breed companies trading at rich multiples now. Rubrik, Inc. (NYSE:RBRK) just completed an IPO, adding to the typical stock hype, yet the stock doesn’t actually trade at a rich valuation. My investment thesis is Bullish on Rubrik following strong quarterly results for the initial quarter since the IPO.
Big Quarter
Rubrik went public back in April at $32 per share to limited hype considering the fast-growing cybersecurity business. The company reported their first quarterly report after going public with the following results for FQ1 '25:
The revenue story is strong, but the stock is down, apparently due to some concern over the cost side of the business. Rubrik is highly focused on subscription revenues for the Zero Trust Data Security platform focused on protecting data surging due to AI, with ARR jumping 46% YoY in FQ1 to $856 million.
Just 3 years ago, Rubrik only had subscription ARR of $153 million with the amount growing 5x in the period. The company forecasts a TAM in the $36 billion range soaring to $53 billion in 2027 with a focus on data management and security offering to provide the data protection for recovery from ransomware and provide cyber resilience.
Note, the company only posted FQ1 revenues of $187 million for annualized revenue of just shy of $750 million. Annualized subscription revenues were only $689 million leaving huge upside with the signed subscription ARR to kick in over the next 12 months.
The cost structure is where the market is probably selling off the stock despite the bullish thesis. Remember, a lot of IPOs have substantially higher initial costs due to stock-based compensation expenses kicking in with the going public transaction and one-time costs for the IPO.
Rubrik reported stock-based compensation of $640 million for the quarter, leading to a massive loss, while the FQ1 '24 SBC cost was only $428K. The company only burned $31 million in cash from operations to provide an example of where the business operations actually sit.
The cybersecurity company produces an ~75% gross margin on the subscription business, suggesting the massive growth in ARR will provide solid leverage for the business. When stripping out the excessive SBC costs for the IPO transaction, Rubrik reported the following FQ1 operating expenses:
- Research & Development - $61 million
- Sales & Marketing - $139 million
- General & Administration - $34 million
- Total OpEx - $234 million.
The amount is still considerable for gross profits below $100 million. The market is rightfully concerned about the financial picture, with Rubrik spending far too much money on sales to obtain the current gross profits.
The company lists an ARR contribution margin in the -10% range, providing a better indication of the subscription business close to covering expenses. The guidance for FQ2 provided a general indication of where the business sits without the excessive one-time costs. Rubrik guided to revenue of $196 million with an EPS loss of nearly $0.50, or equivalent to nearly $90 million, based on ~179 million shares outstanding.
Rubrik targets an ARR approaching $1 billion at the end of FY25. Such a number leads to $250 million in quarterly ARR plus $15 million in maintenance and other revenues would lead to nearly $265 million in quarterly revenues ahead. With at 75% gross margins, the ARR produces ~$188 million in gross profits with quarterly opex costs currently sitting at $234 million already.
Cheap Cybersecurity
Cybersecurity stocks with any solid growth trade at extreme forward P/S multiples. Rubrik only has a listed market cap of $6 billion based on the 179 million outstanding shares, but the diluted share count is closer to 208 million for a fully diluted market cap of ~$7 billion.
Even with the higher market cap, Rubrik is appealing with a subscription base headed towards $1 billion at the end of FY25. The consensus analyst estimates have FY26 revenues of only $1.04 billion, considerably below where ARR will likely jump next FY with just 30% growth leading to ARR of $1.3 billion at the end of FY26.
Based on the revenue levels, the stock only trades at ~7x sales estimates for FY26. The cybersecurity company is forecast to report ongoing losses for several years while investing in the big opportunity in securing data.
The IPO initially raised $710 million in cash by selling 23.5 million shares at $32 and the company ended April with a cash balance of $606 million to fund ongoing losses. The over allotment IPO shares raised another $105 million in May by selling an additional 3.5 million shares.
Takeaway
The key investor takeaway is that investors can still buy a cybersecurity company with 46% subscription ARR growth just above the IPO price. Investors should load up on Rubrik, Inc. shares near the IPO price while focusing on whether the company can cut the ongoing losses in the quarters ahead.
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