KnowBe4’s Stock Surges 50% After Its IPO

After offering its stock for $16 at its initial public offering (IPO), cybersecurity company KnowBe4 (NASDAQ: KNBE) saw its share value skyrocket more than 50% to over $24, driving its valuation from approximately $2.68 billion to more than $3.7 billion in a matter of hours.

While many recent IPOs have seen share value spike right after going public, then plunge, KnowBe4 won big initial gains without the following crash. With its share values still plateaued in the vicinity of 50% above its IPO six days later, where is KnowBe4 likely to go from here?

Why Investors Are Excited About KnowBe4’s Stock 

KnowBe4’s mission is to take on “cybercrime” and “phishing” to help other companies boost their security against these threats. Its methods center on two areas: training and auditing personnel on the idea employees’ ignorance of security risks is one of the weakest points of an enterprise’s cyber defenses, and phishing testing to find vulnerabilities in the client’s security setup.

From the outside, its services appear adequate but not groundbreaking, though the details of its services are naturally not public and it may enjoy something of a first-mover advantage.

KnowBe4’s April 23 prospectus gives some perspective on its financial metrics for 2018, 2019, and 2020, showing the general direction of its operations: 

  • Revenue grew from $71.3 million in 2018 to $120.6 million in 2019 and $174.9 million in 2020. The year-over-year growth was approximately 69% and 45%, possibly showing a slowing—though still very robust—trend.
  • Customer growth shows a similar trajectory, with 22,531 customers in 2018 representing a 53% rise from 2017, 30,259 in 2019 rising 35%, and 36,753 in 2020 rising 21%. KnowBe4 remarks the pattern occurs as “a result of an increased focus on enterprise customers and MSPs, which are subject to longer sales cycles” and that “as our customer base grows and as our market penetration increases, we do not expect to continue to grow at the same year-over-year rate.”
  • Recurring revenue from long-term customers was $88.7 million in 2018 (up 91% year over year), $145.4 million in 2019 (up 64%), and $198.4 million in 2020 (up 36%).
  • At the bottom line, the company has generated only net losses, losing $9.3 million in 2018, $124.3 million in 2019, and $2.4 million in 2020. Net loss per share for the three years was $0.10, $1.91, and $0.06 respectively.
  • KnowBe4 ended 2020 with $84.6 million in cash and cash equivalents.

Cybersecurity: A Sector Ripe for Many Acquisitions

KnowBe4 doesn’t exist in isolation and the conditions of its sector also affect its future share value. In its prospectus, KnowBe4 compared itself to several of its competitors, including Proofpoint (NASDAQ: PFPT). Proofpoint made headlines itself this week when the news broke that it is being acquired for $13.2 billion, or $176 per share, by privately held private equity firm Thoma Bravo. The acquisition will close in Q3 2021.

Proofpoint’s shares gained explosively in value following the acquisition announcement, and are now trading at around $172 per share, their all-time high. According to CRN reporting and other sources, Proofpoint experienced powerful growth between its 2012 IPO and 2018, when it reached a plateau and only climbed slowly until this week’s action:

  • Proofpoint went public at $13 per share.
  • In the years since, its valuation has increased more than 1,000%.
  • The company’s stock price rose from $13 in 2012 to $122 in April 2018, at which point rapid growth effectively halted.
  • Between April 2018 and April 2021, its share price only rose from $122 to $131. However, news of the acquisition drove the price up more than 31% in a single day.
  • KnowBe4’s share price also rose on the acquisition news about its rival.

Wedbush Securities weighed in on the Proofpoint acquisition by predicting a flurry of mergers and acquisitions (M&A) in the cybersecurity sector. In the vivid phrasing of its analyst Daniel Ives, there appears to be a “cyber security arms race” underway, and “with $500 billion of dry powder among PE/financial buyers and strategic players we expect a massive M&A spree in the software and cyber security space” during next year to year and a half. 

What This Means for KnowBe4’s Stock Forecast

While KnowBe4 is currently valued at approximately 18 times its sales, the rosy expectations of investors reflected in its continued gains might have some foundation in reality. The company’s metrics are improving even if growth is slowing and it is still operating at a slight loss and cybersecurity is taking off.

If KnowBe4 continues as a standalone company, it could see equivalent gains to Proofpoint during the latter’s early years, while if it, too, is targeted for acquisition during the upcoming merger frenzy foreseen in the sector by analysts, its shares will almost certainly rocket higher and reward those with a stake in the company.

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Rhian Hunt has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.

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