Thursday, August 11, 2022

The Cyren call

Turnarounds seldom turn.

That means you should look and even bet on stocks in turnarounds.

If turnarounds usually do not work, expectations are low. This means the vast majority of investors have sold the stock. Your downside in the stock is limited.

When expectations are low, the stock only needs a little shift in expectations to move higher. Your upside is potentially large.

Heads you win. Tails you don't lose much.

Why wouldn't you like those odds?

You won't need the turnaround to work. All that is needed is a slight shift in expectations that it would work. 

Some stocks in turnarounds have a better chance to move than others. Economic tailwinds, recurring revenue, and active equity owners can shift the odds in your favor.

Cyren Limited (NASDAQ: CYRN) is a stock in turnaround worth betting on.

Cyren provides SaaS-based cybersecurity products that detect malware, phishing, and other threats.

I am no expert on cybersecurity. All I know is that the industry progresses rapidly. Cyren appears to have lagged behind its peers for years, but it has survived because of how its products are distributed. Cyren's products are built into software sold as a bundle to enterprises, allowing the company to ride on coattails.

This strategy worked until the rise of hacking and large ransoms motivated CIOs to scrutinize and demand better cybersecurity.

Revenue stagnated and declined starting in 2014. Warburg Pincus, a large venerable private equity firm, bought a 50% stake in 2017, perhaps attracted by recurring revenues from enterprise contracts, low valuation (~2.2x ttm sales vs 5.3x peak), and the potential for large profits from a turnaround.

Investors were very optimistic about Warburg's involvement, sending the stock 33% higher a month after. For the next two years, they were right. Warburg pushed for more software bundling and larger contracts, restarting revenue growth.

But the core issue of lagging technology was never solved. Revenue peaked in 2019 and declined after, even during Covid. Covid started the work-from-home movement and boosted the demand for enterprise cybersecurity (that extended into homes). But Cyren was one of few SaaS companies that failed to capture the tailwind.

Warburg appeared to have stumbled in Cyren. Why should anyone bet on it succeeding now?

Because expectations have never been lower. 

Very low expectations mean the stock only needs a bit of optimism to move higher.

Cyren trades at .95x net cash and .63x book, on a fully diluted basis (excluding 'busted' warrants with >$10/sh strike prices that won't be redeemed for a long time, if ever) and after the sale of a segment for 10m euros. This is a stock that has traded mostly >2x book (more than 3x higher from current) since 2010.

At the start of Warburg's involvement, Cyren traded at 4x sales and 6x GP. Now it's only .5x sales and 1x GP. 

No one expects Cyren to turn around, which is exactly the right time to bet on it.

Amidst the gloom, the company came up with a new anti-phishing product that has doubled revenues in the past year. The new product was so promising that a legacy business was sold to raise capital for it.

The new product may result in the optimism that the stock needs to move higher.

Warburg bought most of its stake at $40-50/sh (split-adjusted) in 2017. The stock has declined 95% to <$2/sh now. But Warburg still owns about 30% of Cyren. I think the firm would stick around to support the stock and minimize losses. Otherwise it would have exited long ago. 

In Greek mythology, Sirens are half-bird, half-beautiful maidens that sang to lure passing sailors to their doom. But for this Cyren, I am heeding its alluring call.