KnowBe4: Great Secular Trends Pushing A Great Business (NASDAQ:KNBE)

The KnowBe4, Inc. (NASDAQ:KNBE) team develops, markets, and sells a cloud-based security awareness system. This new company provides a platform for social engineering prevention, with features like simulated phishing, analytics, and reporting, to address the pervasive problem of social engineering. KnowBe4 is in high demand because it effectively helps businesses of all sizes safeguard their employees from phishing and other forms of cyber fraud.

As many of you know, I started KnowBe4 to help organizations manage the ongoing problem of social engineering. We are the only public company dedicated to securing the human layer, a layer that continues to prove itself exceedingly critical to organizations of all sizes, public or private. The environment that we find ourselves in today has transformed this even further. We believe that securing the human layer is a matter of national security.

Stu Sjouwerman, CEO, Q2 2022 Earnings Call.

Its offerings include the Kevin Mitnick Security Awareness Training program, a product designed to raise workers’ awareness of cybersecurity risks, and Compliance Plus, a product designed to help businesses provide their workers with up-to-date and interesting compliance content on subjects ranging from data privacy to diversity, equity, and inclusion.

Security professionals can use PhishER, the company’s security orchestration, automation, and response product, to prioritize and automate security workstreams in response to human-layer attacks. In addition, KnowBe4 Compliance Manager, the company’s governance, risk, and compliance product, helps businesses analyze security risk and automate the management of compliance and audit functions.

In addition, the business provides a product called Security Coach, which is designed to detect and respond to potential threats posed by people’s actions.

Risks associated with poor password hygiene, such as the use of simple passwords or those that are easily cracked, can be reduced by employing a password management system like PasswordIQ.

It serves its customers directly through inside sales teams for enterprise and small and medium businesses, as well as indirectly through channel partners and managed service providers.

The Macro Environment: Security May Be Shielded

Certain sectors are impervious to the cyclical nature of corporate budget cuts, despite the fact that no business can be totally protected from inflation and the effects it has on its downstream effects. In light of the fact that KNBE occupies the dominant position within the sector, the firm has made it clear on several occasions that it does not anticipate any kind of a slowdown in the pipeline.

We definitely monitor every single part of our sales cycle. And we are really not seeing any material changes in anything, be it number of opportunities coming in, our lead generation, our time for a sales cycle. I mean everything up to this point seems to be cranking along as normal… The first reason for my confidence comes from the industry that we’re operating in. Cybersecurity budgets are resilient. It is well known that the cybersecurity posture of an organization is crucial. However, the critical role that the human being plays in cybersecurity has only become clear within the past few years and is becoming more evident all the time.

Stu Sjouwerman, CEO.

Given the diverse nature of the businesses that employ KnowBe4 to educate and manage their Human Security, there is diversification in revenue streams. This, coupled with instantaneous results as made evident below, place KnowBe4’s system and expertise as vital for many companies.

Growth Drivers

There are a number of causes that are contributing to this expansion, including the prevalence of “bring your own device” regulations in workplaces, the rise in both the frequency and sophistication of assaults, and the increasing popularity of cloud computing among organizations. In spite of the fact that phishing via email is more prevalent than ever, more recent techniques, such as phishing by SMS, are making substantial headway. During the time period covered by the forecast, it is predicted that the marketplace for solutions will increase at a rate that will be greater than that of the market for key infrastructure.

Industry

In order to have a complete understanding of KnowBe4, one needs to be aware of the threat that is posed by social engineering attacks that are directed at human users. These attacks go beyond the scope of software-based security solutions that are offered by competitors such as CrowdStrike Holdings, Inc. (CRWD). KnowBe4 compensates for a serious deficiency in the industry by delivering the fundamental education that is necessary for end-users to be prepared to serve as the initial defensive line. This strategy of employing end-users as the first line of defense is an essential component to the success of KnowBe4 in gaining universal support.

Financial State Of The Company

Management’s color on the slowdown in sales, or lack thereof, is further reinforced by the company’s industry-leading gross margins, as mentioned above. Gross margin expansion during a period of rising costs is indicative of strong pricing power. The company’s continued ability to generate free cash flow from operations is enabling it to continue fostering additional growth. A sustained expansion of the company’s free cash flow margins provides support for the high valuation multiples at which it trades.

In addition to the continued stability of margins, the company continues to maintain a significant cash balance, which will enable it to either consolidate the players within the industry or their outstanding debt, and will consequently enable management to employ capital in anticipation of the subsequent stage of growth within the industry.

According to predictions provided by Bloomberg for customer growth and New Order Value, industry analysts anticipate a continuing strong uptick in the use of KnowBe4’s services. This may be ascribed to the thematic nature of the company’s operations, since continuing assaults on businesses are becoming more apparent in the press. As a result, this will continue to be a driving force for wider adoption of the company’s services.

KnowBe4 is a business that is not valued at a single-digit multiple; therefore, an acquirer of the stock will be expected to pay up for future growth. However, in comparison to all of its competitors, KnowBe4 demonstrates the most robust potential for expansion. On the basis of the fundamentals, the valuation for KNBE is reasonable given that its gross and net profit margins lead their respective peer groups, as well as its free cash flow margins, which is the measure that I find most useful. Within the context of the current market environment, this appears to be a one-of-a-kind opportunity given that it is priced at a more attractive entry point to CRWD and has a stronger thematic story as well as leading fundamentals.

Final Thoughts

KNBE is a leader in the niche market of human security, which is a subsector of the security industry that will continue to display double-digit growth for the foreseeable future due to the continued complexity of attacks. This subsector of the security market is an area in which KNBE excels.

Cyber attacks are the new bank robberies.

An adage that holds water, due to the software-driven world we live in, data can sometimes be seen as a more desirable commodity to acquire. Regardless of how one chooses to look at it, you will end up paying for growth, and despite the fact that the price of the company has decreased in parallel with the market in 2022, it is still quite expensive. However, I enter this position in KnowBe4 understanding that growth will not come from multiple expansion, but the continued facilitation of adoption within companies.