1 Cybersecurity Stock To Watch Closely

Cybersecurity and IT company CSP Incorporated (NASDAQ:CSPI) has surged in recent months, delivering returns of more than 115% YTD.

While long time shareholders have seen substantial gains, this momentum is naturally attracting attention from investors interested in the company.

CSPI is a mixed bag of both strengths and weaknesses, requiring careful consideration from investors who are looking at adding the stock to their portfolios.

Profitability and Strong Financials

While many technology stocks promise returns on the basis of eventual profitability, CSP has the advantage of already being in the black.

Over the trailing 12-month reporting period, the company has successfully generated $5.2 million in net income on revenues of $61.7 million.

The 6.3% net margin the company maintained over this period is modest but still respectable.

In Q4, the company briefly slipped back into negative territory, reporting a net loss of $0.02 per share. This loss, however, was likely more an accident of timing than a reflection of fundamental weaknesses in the business.

As noted by management in the quarterly report, the loss was due to a delay in new contracts until after the holidays. These contracts were reportedly completed in Q1.

Another strong suit of CSPI is its financial position. The company carries no significant debt and maintains a reserve of cash and cash equivalents of $25.6 million. While modest for most companies, this cash reserve is significant for a company of CSP’s size.

Careful balance sheet management has allowed CSP to become one of relatively few small tech companies that pay a quarterly dividend.

Does CSPI Have a Moat? 

One of CSP’s biggest problems is its lack of a clear competitive moat. As a very small company operating in an increasingly competitive market, it wouldn’t take much for larger, more dominant cybersecurity firms to squeeze CSP and impede its future growth.

Even with new contracts being signed, it’s not immediately apparent that CSP has a competitive advantage that will help to set it apart from other cybersecurity providers.

CSPI’s revenue growth has also been far from consistent. While recent reports have shown growth from the low points set in 2021 and 2022, CSP’s revenues peaked in the mid-2010s and have since fallen off significantly.

This fact is all the more meaningful in light of recent trends for the company. Despite strong earnings growth, CSP’s revenues actually fell by 8.4% year-over-year in Q4.

This unpredictable revenue growth also calls into question the stock’s valuation. Shares trade at 3.4x sales and 35.1x cash flow. These levels are far from unreasonable for a high-growth tech stock. In light of CSP’s rocky revenue history, though, investors may want to see clearer signs of long-term growth before paying these premiums.

What Does CSP’s Growth Outlook Look Like?

In recent months, CSP has scored some significant wins in pursuing sustainable growth. For example, in the company’s Q4 earnings report, management detailed a deal with a Fortune 50 pharmaceutical company for the use of its Aria Zero Trust PROTECT cybersecurity product.

This contract is expected to contribute multiple millions of dollars to CSP’s top line. During the quarter, a contract of similar size with an educational institution in Florida was also renewed for a further five years.

CSP’s insiders clearly believe the company is on a strong growth footing. Insider ownership stands at a lofty 15.3%, and no company insiders have sold shares since Q1 of 2022.

Management’s confidence in the prospects for persistent growth and positive future earnings can also be seen in the decision made at the end of Q4 to raise CSPI’s quarterly dividend to $0.05 per share, doubling it from its previous level.

It’s also worth noting that CSP operates in a fast-growing market that could provide a tailwind for the company. Through 2030, the cybersecurity market is expected to maintain double-digit compounded annual growth rates.

Even without a significant competitive moat, growth in cybersecurity spending could propel solid growth for a small company like CSP.

Turning to the company’s dividend, with a payout ratio of just above 20%, CSP’s payout could still have a great deal of room left for growth, especially if earnings continue to advance in the future.

Finally, CSP closed a partnership with a software reseller late in 2023. The primary product that this reseller will distribute is Aria Zero Trust PROTECT, the same product that allowed CSP to take on a pharmaceutical major as a customer.

Through this reselling entity, CSP has the potential to gain access to a customer base of up to 6,000 businesses. This partnership will likely drive further revenue growth, though it’s not yet clear exactly how many of the partner entity’s customers will need CSP’s products.

So, Is CSPI Stock a Buy?

New partnerships open up substantial sales opportunities that make CSPI a stock to buy. In addition, existing profits and a good financial footing both bode well for the company, and management has returned the company to the higher levels of performance it reached in the middle of the last decade.

Furthermore, growth stocks like CSPI are apt to benefit from the probable interest rate cuts that the Federal Reserve is forecast to enact later this year.

The problem, however, is the company’s unstable revenue growth. A single quarter of losses such as CSP experienced in Q4 isn’t a huge concern, especially in light of the fact that the delayed contracts were ultimately signed early in Q1.

Q4 was, however, the second consecutive quarter in which revenues contracted on a year-over-year basis. As such, it’s difficult for investors to determine whether CSPI can deliver long-lasting growth.

Overall, CSPI appears to be a hold at the moment. Investors who already own shares are likely sitting on substantial unrealized gains, and the company’s current trajectory doesn’t appear to make a major reversal likely.

Due to the lack of consistent revenue and earnings growth, however, new investors may prefer to wait until more stable trends have been established in the company’s performance.

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