Stock Analysis & Ideas

Magnet Forensics: A Cybersecurity Stock That Isn’t Overpriced

Magnet Forensics (TSE: MAGT) develops digital investigation software. It acquires, analyzes, reports on, and manages evidence from digital sources, including computers, mobile devices, IoT devices, and cloud services.

Magnet Forensics is a very strong business that has the backing of analysts. As a result, we are bullish on the stock.

Growth Catalysts

Magnet Forensics operates in the cybersecurity industry, which was valued at $133 billion in 2021. Between 2022 to 2027, the industry is expected to see a compound annual growth rate of 14.1%.

More specifically, Magnet Forensics offers tools designed for digital investigations and intelligence. This niche within the cybersecurity umbrella was valued at $6.3 billion in 2021 and is expected to grow at a compound annual growth rate of 10.1% from 2021 to 2026.

This demonstrates that the industry is very healthy and growing at an impressive rate, which makes sense considering how important technology has become in our everyday lives. This reliance on technology will only continue to increase in the years to come, setting the stage for an increase in cybercrime.

Indeed, the rate of cyberattacks has increased over the past several years. In 2017, 77% of organizations were compromised by at least one successful cyberattack. In 2021, the rate increased to 86%.

Thus, as important as preventative measures are, being able to determine the “who” might be even more critical, considering the staggering number of successful attacks. In addition, the company’s platform isn’t only limited to cyberattacks. It can also be used to gather evidence of criminal activity from electronic devices much more efficiently.

Therefore, these factors provide strong tailwinds for the company to see continued growth, going forward. Indeed, Magnet Forensics has guided for revenue growth of 30% to 33% in 2022, which is very impressive considering the company is free cash flow positive.

Magnet Has Flawless Financials

When analyzing the company’s financial statements, the thing that stands out the most is its gross margin. Magnet Forensics is able to consistently achieve margins greater than 90%, which is not a common feat in the business world.

As a result, it is able to guide for 30% revenue growth while also expecting EBITDA margins in a range of 14% to 16%. It also allows the company to reinvest a larger portion of its revenue into research and development, which is the most crucial expense for technology companies.

If a tech company doesn’t innovate, it will surely fall behind competitors that will render its products and services obsolete. Therefore, being able to meaningfully invest a larger portion of its revenue into research and development will help it fend off competitors.

In addition, Magnet’s balance sheet is rock solid. In fact, just the company’s cash position is almost two times greater than its total liabilities. As a result, there is currently very little financial risk.


When valuing Magnet Forensics, we want to focus on its free cash flow as it will give us a better picture of the company’s performance. Using analysts’ estimates, Magnet is expected to achieve free cash flow of USD 19 million, roughly CAD 24.5 million at current exchange rates.

After the recent sell-off that has pushed the stock’s price down under $18 range, its forward EV/FCF metric is about 23.2x. Considering that the company is growing profitably at 30% plus, it’s probably one of the most reasonably priced cybersecurity stocks with a high growth rate.

Are the Numbers Too Good to be True?

Something investors should always do is question if something is too good to be true. It’s always possible that a company might be an earnings manipulator.

To figure out if this may be the case, we will employ a method known as the Beneish M-Score, which can help us identify if a company is an earnings manipulator.

The interpretation is quite simple. If the M-Score is greater than -1.78, then the company is likely an earnings manipulator. In contrast, if the M-Score is less than -2, then the company is not likely an earnings manipulator. Lastly, a score that is between -1.78 and -2 is a possible manipulator.

Although the interpretation is simple, the calculation is not and requires many steps. The formula for this method is as follows:

M-Score =

(+) 0.92 × DSRI
(+) 0.528 × GMI
(+) 0.404 × AQI
(+) 0.892 × SGI
(+) 0.115 × DEPI
(+) -0.172 × SGAI
(+) 4.679 × TATA
(+) -0.327 × LVGI


DSRI = Days Sales in Receivables Index
DSRI = (Net Receivablest / Salest) / (Net Receivables t-1 / Sales t-1)

GMI = Gross Margin Index
GMI = [(Sales t-1 – COGS t-1) / Sales t-1] / [(Sales t – COGS t) / Sales t]

AQI = Asset Quality Index
AQI = [(Total Assets – Current Assets t – PP&E t) / Total Assets t] / [(Total Assets – Current Assets t-1 – PP&E t-1) / Total Assets t-1]

SGI = Sales Growth Index
SGI = Sales t / Sales t-1

DEPI = Depreciation Index
DEPI = (Depreciation t-1/ (PP&E t-1 + Depreciation t-1)) / (Depreciation t / (PP&E t + Depreciation t))

SGAI = Sales General and Administrative Expenses Index
SGAI = (SG&A Expense t / Sales t) / (SG&A Expense t-1 / Sales t-1)

LVGI = Leverage Index
LVGI = [(Current Liabilities t + Total Long Term Debt t) / Total Assets t] / [(Current Liabilities t-1 + Total Long Term Debt t-1) / Total Assets t-1]

TATA = Total Accruals to Total Assets
TATA = (Income from Continuing Operations t – Cash Flows from Operations t) / Total Assets t

Now that we have defined the formula, we need to gather the data to input into the equations, which you will find in the image below:

Image created by the author

Now that we have the required data, we can carry out the calculations which we have summarized in the image below:

Image created by the author

Therefore, Magnet Forensics is not an earnings manipulator because it has an M-Score of -2.69.

Wall Street’s Take

Turning to Wall Street, Magnet Forensics has a Strong Buy consensus rating based on four Buys assigned in the past three months. The average Magnet Forensics price target of $40.50 implies 128% upside potential.

Final Thoughts

Magnet Forensics is a very strong business that is growing very fast while remaining profitable. It has solid financials, a reasonable valuation, and also has the backing of analysts who think the stock can potentially more than double. As a result, we are bullish on the stock.

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