📮The Sunday Newsletter archive

The Zero Trust security leader

Investors love the enterprise software space. Stocks in this industry trade at the highest multiples and boast the strongest returns. And that’s because enterprise software firms have quite predictable and stable financials. If you look at the market performance over the past decade, you’ll find several 💸 multibaggers in that space.

One of those multibaggers is Okta ($OKTA), a Zero Trust Security software firm that has risen 10-fold since its 2017 debut. Now one of its biggest competitors, ForgeRock ($FORG), is also planning to get listed. If Okta’s performance is any indication, ForgeRock will be a big winner.

Since there are no scheduled IPOs (again) for the week ahead, in today’s issue, we’ll discuss this interesting cloud-based software firm that’s going public soon, let’s see.

Zero trust 👀

As its name suggests Zero Trust means that companies don’t trust anyone, either from the inside or from the outside. So in order for someone to get access to company data or systems, their ID must be verified.

The leader in this security niche is Okta, which is now a $40 billion company. It offers solutions like multifactor authentication, server access control and single sign-on among others. Single sign-on is an authentication method that lets users use only one set of more complex login credentials to access multiple apps at the same time.

ForgeRock is one of Okta’s biggest competitors and offers similar services. What makes the company different is its focus on large enterprises. Unlike Okta that’s used by companies of any size on a self-service business model, ForgeRock offers only custom services. That’s why it has only 1,300 customers while Okta has more than 10,500. But zero trust security is a sector with strong growth potential, so both companies can continue to grow.

With cyberattacks on the rise and the work-from-anywhere trend stronger than ever, security is becoming a big issue. And as companies become more digital and remote and the systems more complex, Zero Trust 👁👁 security solutions will only increase in demand. ForgeRock is one of the leading providers of such solutions with companies like BBC, Berkshire’s ($BRK.A, $BRK.B) GEICO and Comcast ($CMCSA) using its services. Thus, it’s very well positioned to continue winning more customers in the future.

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Strong financials

ForgeRock is growing fast, in the first half of 2021 growth picked up significantly and margins are moving in the right direction. For the first 6 months of the year, revenue increased 53.2% y/y to $84.8 million, a sharp acceleration from the 22% growth it reported in 2020. At the same time, its operating margin improved to -10.9%, from -25.1% last year, which shows that the company has a clear path to profitability.

ForgeRock is a SaaS firm; in 2020 subscriptions accounted for 99% of total revenue, so it’s super important to take a look at its Net Retention Rate. As you can see in the chart below, its NRR has increased over the past 2 years and is now at a healthy 113%; a sign of the strong growth potential of Zero Trust solutions.

ForgeRock Net Retention Rate chart.

In the first half of the year, NRR fell slightly as some employees returned back to offices, so companies stopped using security solutions for some of them. It’s very likely that the NRR will fall further in the second half of the year as more employees show up in person.🙋‍♂️

What else?

ForgeRock customers are all large enterprises which is not always a good thing. The company could miss analyst estimates more often than other software firms as its revenue growth will be lumpy due to the longer time it takes to close a deal. And that would make its stock quite volatile. Okta has risen 10-fold virtually in a straight line because it deals with both small and large companies, making its revenue growth smoother. This might not be the case with ForgeRock.

And what about valuation? Well, we don’t know its expected valuation yet; in its first prospectus, it didn’t disclose how many shares it would sell or their price range. That info will come with future fillings, so we’ll discuss more IPO details in the Sunday Newsletter before its trading debut; stay tuned. ✌

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