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Bull Of The Day: Zix (ZIXI)

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Zix (ZIXI - Free Report) is a small-cap cloud security player with large cap dreams. The stock has propelled back into growth following a savvy acquisition earlier this year. Sell-side analysts have become increasingly optimistic about this stock and have continued to push their estimates higher. ZIXI has been thrown into a Zacks Rank #1 (Strong Buy).

Zix is an under the radar stock that not many investors or analysts are familiar with. Its lack of visibility in the market makes this stock more vulnerable to be undervalued and creates an opportunity for us as investors.

The Business

Between 90-95% of enterprise data breaches occur over email creating an enormous amount of demand for email protection software. Zix‘s intuitive cloud-based encryption and data protection platform makes it easy for any business to protect themselves from digital adversaries no matter the firm’s internal infrastructure. Zix’s focus is on small to midsized businesses, a market that has not been fully penetrated and one that has a vast need for this type of protection.

The firm’s primary product offering is intuitive email encryptions that makes its easy for both the business and the recipient to communicate safely without the fear of their information being at risk. Most of Zix’s customers are in healthcare, financial services, insurance, and government sectors.

Zix uses tech’s golden business model of reoccurring revenue, which gives the firm a safeguard against most cyclicality. The company’s cloud-based offering makes up 79% of its annual reoccurring revenue.

The company had been growing its topline at single-digit levels up until its acquisition of AppRiver.

Recent Acquisition

Zix’s timely acquisition of competitor AppRiver in the first month of 2019 has positioned the combined firm to be a leading playing in cloud-based email protection for small and midsized businesses (SMB). The deal was worth $275 million, which doubled Zix’ prior market value.

According to Zix’s press release in January the “combination creates leading cloud-based email security provider to small and midsize business (SMB) market with over $180 million of annual recurring revenue.”

This acquisition significantly escalated the level of long-term topline growth for Zix into double-digit expansion. Below is the breakdown of the past 5 quarters of revenue and the growth that AppRiver is bringing to the table for Zix. This graphic is prodived by Zix's investment relations team on page 19 of its August 2019 investor presentation.

Performance and Valuation

ZIXI had traded relatively flat up for years until its acquisition announcement of AppRiver. This year so far this stock has traded up almost 100% and then trailed down a bit as investors are trying to find the sweet spot that fully illustrates the combined synergies of this new company. Today the stock is up over 25% for the year.

ZIXI is trading at very reasonable multiples, both on the lower side of its 5-year trends and far below its competitors. The stock is trading at a forward P/E of 16.4x and a P/S of 2.1x which represents a value buy for a stock that has growth written all over it.

Take Away

Cloud-based email protection is becoming a necessity for businesses of all sizes. Customer and proprietary information are increasingly at risk and a big portion of the SMB market isn’t protected. Zix is positioned to take control of this massive market and its cloud-based offering makes it accessible to any business no matter the infrastructure

ZIXI’s low valuations, large growth potential and under the radar characteristics creates an opportunity for you to get in while it is still cheap.


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