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The following segment was excerpted from this fund letter.
Cellebrite (NASDAQ:CLBT)
Cellebrite’s software is used by law enforcement to manage digital investigations with products that enable law enforcement to access data on cell phones without knowing the passcode. 90% of their revenue is from government sources and 10% from large companies – they have zero exposure to the individual consumer and have reported customer churn of 2%. Governments need their products.
Cellebrite benefits from several trends. As the company disclosed in their initial investor presentation, data stored on devices has grown between 2,000X – 8,000X in last 17 years. Annual cell phone sales have gone from 300M in 2010 to 1.6B last year. Apps and encryption are increasing, as is complexity, and the use of crypto currencies further complicates the financial tracking of crimes. This combination of trends heightens investigators’ need to have powerful tools to gather, organize, and analyze data in digital investigations.
Beyond their initial suite of useful offerings, Cellebrite is expanding their product lines to meet these diversifying needs. Our digital lives increasingly reflect our real lives, and it is implausible that texts, geo locations, emails, photographs, and other digital communications will play less of a role in criminal investigations, even in a recession.
The company is profitable, has 80%+ gross margins, and self-funded for more than a last decade. They are currently investing heavily in product and sales, which has led to depressed earnings in the short term, dragging EBITDA margins to between 7-9% this year (guidance).
However, EBITDA margins were as high as 21% just two years ago and the company has guided to 25-35% long-term, so I consider it highly likely that profitability will revert to higher margin levels as these investments are harvested. Cellebrite shares ended the quarter trading at approximately 2.5X recurring revenue, which is growing 30%+. At EBITDA margins of just two years ago, shares would be trading at approximately 10X EBITDA.
Boutique brokerage firm Cowen has a $10 price target on Cellebrite, more than 150% higher than its latest quarter-end price. Embedded in this target is a 5X multiple on 2023 revenues with revenue growth at 20%. Given the company’s current investment in sales and product, historical growth rates, and focus on government agencies as their end customers, neither the sales growth nor the multiple strike me as particularly aggressive.
The combination of a very strong and stable customer base, an expanding product portfolio, and large investments in new products and sales set Cellebrite up well to navigate the headwinds of a slower economy and higher interest rates. If public market investors do not recognize this, private equity firms have a long history of buying software businesses like Cellebrite at far higher multiples.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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