Why Is CSPI Stock Going Up?

While companies like NVIDIA and Microsoft stole the stock market show in 2023, IT and cybersecurity firm CSPI Incorporated (NASDAQ:CSPI) blew the market completely out of the water.

Up 804% over the past year, this small technology company has generated outsized returns for its shareholders. Why is CSPI going up, and can this trend of remarkable gains continue?

CSPI’s Performance-based Momentum

CSPI had already been delivering strong returns for investors over much of the last year on the basis of its performance. The most notable development for CSPI has been a marked turn back to profitability.

In 2023, the company generated earnings of $0.86 per share. In both Q1 and Q2, year-over-year earnings growth rose into triple-digit territory.

Though this renewed period of positive earnings actually goes back to early 2022, 2023 was the first year of significant recovery after a losing streak that began in 2019. Last year, CSPI averaged a net margin of 6.3%.

CSPI shareholders also had other causes for optimism as the company notched a series of major wins over the course of last year.

In its Q4 report, for example, CSPI detailed its first multi-million dollar contract with a Fortune 50 pharmaceutical company. Other major contracts were delayed but are expected to appear in the company’s Q1 results.

Looking forward, the company is likely to experience further revenue and earnings growth as its products become more widely adopted. One of the most beneficial business updates of the Q4 report, for example, was CSPI’s new partnership with a cybersecurity reseller with a 6,000-strong customer base.

Between current profitability and a decent future growth outlook, the market rapidly revised its views on CSPI shares upward. Although it’s difficult to put an exact value on the company’s future, contracts and recent earnings growth has been so explosive that it’s clear CSPI is on the right track.

Why Is CSPI Stock Going Up?

CSPI stock went up by 235% over a five day period following a stock split announcement. Management announced a 2-for-1 stock split structured in the form of a 100% stock dividend. 

While such enthusiasm from investors often accompanies a stock split, doubling the number of shares doesn’t increase the value of the company.

The enthusiasm for split stocks is often a function of market psychology, as many investors perceive stocks to be more affordable after a split has taken place.

This view, however, fails to take into account the intrinsic value of the underlying business, which remains unchanged irrespective of how many shares the company is divided into.

Is CSPI Overvalued?

Given the skyrocketing share prices since the announcement of CSPI’s stock split, it’s worth asking whether the stock is currently overvalued.

CSPI seems to be priced at the kind of premiums one might normally expect from a high-growth company. The stock trades at 4.1x sales and 38.0x cash flow. Both of these numbers would be quite high for a mature company, but the recent earnings growth rate that CSPI has seen makes these multiples appear fairly reasonable.

It is worth noting, however, that CSPI’s valuation is running well above its past levels. For most of the last 10 years, CSPI had traded under 1.0x sales. This was even true during earlier periods of profitability.

While the company may have significant potential, it’s clear that investors are paying a premium compared to how CSPI has historically been priced.

Surprising Sales Trend Worries Investors

Total sales peaked in 2016 and have been trending slowly downward ever since. Though CSPI is currently delivering decent earnings that could be a positive sign of things to come, the company will have to generate steady and sustained revenue growth or greatly expand its net margins to justify its current pricing.

It’s also worth considering that CSPI has enjoyed multiple brief periods of profitability in the past. Up to now, however, these have proven to be unsustainable. Given this fact, it may behoove investors to wait for a stronger trend of sustained positive earnings to emerge before paying the current premium for CSPI shares.

Finally, CSPI may be subject to high levels of volatility that could prove concerning for investors. While returns of over 800% are impressive, it’s entirely possible that the stock will experience steep losses at some future point as the market attempts to establish its true value.

This is something of a native risk of small-cap growth companies like CSPI. With a market cap of under $300 million and a rapidly changing set of fundamentals, this stock could see dramatic price action in both directions

Is CSPI a Buy?

Between emerging profits and strong forward potential for revenue growth from its new contracts, CSPI has the potential to be a stock with a good story ahead of it. In addition to these factors, the company also has no significant debts, allowing it to deploy its cash into growth initiatives.

Another argument in CSPI’s favor is its potential for dividend growth. The stock yields 0.40% at the moment, but sustained earnings growth will likely allow management to raise its dividends to much higher levels over the coming years.

On the downside, CSPI’s premium pricing and the historical volatility of both its revenues and earnings could detract from the value argument for the stock. Until a stronger trend of growth can be established, it will be difficult for investors to appropriately value the stock on the basis of future cash flows.

Overall, CSPI is a promising company, but the massive increase in prices over the last year may have already run as far as is reasonable.

In light of the uncertainties surrounding this company’s future, CSPI appears to be a good stock to watch but perhaps not to buy at the moment. If future quarters bring continued growth and a stronger trend emerges, investors may be able to buy with more confidence.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.