Today we cast our gaze to the Great White North — a pitch about a small-cap Canadian cybersecurity stock has sent a few questions my way, so it’s time for the Thinkolator to convert to metric and get us some answers for this Motley Fool teaser.

The pitch is from Motley Fool Stock Advisor Canada, (C$99 a year, renews at C$199), which tends to pitch both one Canadian stock and one US stock each month (with the US stock often shared with their brethren at Motley Fool Stock Advisor), and the big-print part of the pitch that really grabs the eye is their claim that “This Stock Could Be Bigger Than Shopify.”

That’s always the dream, no? Motley Fool Canada and the US-based Motley Fool Rule Breakers were both early to the Shopify (SHOP) story… and yes, we covered that tease way back when as well (and thankfully bought a few shares), and with a 3,700% return it’s one of the best performers on the tracking spreadsheets — so even though we know hitting a home run a couple years ago doesn’t mean anything about the current time at bat, we’re intrigued.

What’s the promise this time? Here’s a little bit of the spiel, which came in via email this morning:

“One Killer Stock For The Cybersecurity Surge

“An obscure Canadian company is taking over Silicon Valley, one device at a time.

“They’ve signed exclusive partnership deals with tech titans like Microsoft, Samsung, HP, Dell, and Lenovo.

“Even Under Armour has enlisted them to protect their intellectual property.

“And if you’re reading this on a laptop, tablet, or smartphone—their unique ‘self-repairing’ technology might already be inside your device!”

What else are we told about this “self-repairing technology?” They say it’s “ready for activation” in 500 million devices, and that it is somehow pre-installed on most new laptops… so that creates a big potential market. What else?

Well, it’s listed on the Toronto Stock Exchange.

We’re told they have 140 patents protecting their “self-repairing” technology.

And the product is sold on some sort of subscription model, which is what all investors want to hear — they say it “guarantees 1 to 5 years of recurring revenue” per sale.

One more bit from the ad:

“If this company’s technology is enabled on only 10-20% of devices, our analysts are convinced they will be “massively successful.”

“And if they go far above and beyond that?

“Well…they could become the next famous Canadian success story.

“In fact, we think they could become as big… or even BIGGER than Shopify.”

So yes, that’s a tall order — hard as it is to believe, Shopify is now a $140 billion company… but where do those clues send us?

Thinkolator sez this is… Absolute Software (ABST in both NY and Toronto).

And yes, I confess that I had never heard of this one before five minutes ago. Here’s how they describe themselves:

“Absolute Software is a leader in Endpoint Resilience solutions and the industry’s only undeletable defense platform embedded in over a half-billion devices. Enabling a permanent digital tether between the endpoint and the enterprise who distributed it, Absolute empowers IT and Security organizations with complete visibility, control, and Self-Healing Endpoint security.”

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They have been reporting steady growth in the past couple years… but nowhere near the high-end sexy levels of a lot of technology companies. Here’s the five-year chart of trailing revenue growth for Absolute and Shopify, just to give some perspective — that’s SHOP in orange, ABST in blue:

So that’s what raises my eyebrows a little bit — this is a that provides endpoint security, securing all the devices of a company… and yet, in the year when just about every single employee went remote and created a whole new world of headaches for IT managers when it comes to managing all those laptops, their revenue was up by only 14% and their income actually dropped. So what’s going on?

Well, it is a Cloud/SaaS stock, which investors tend to love — recurring revenue is more appealing than one-time sales, but the fact that they’ve been publicly traded for 20 years but still trade at about 5X sales and pay a decent dividend tells us that this is a different kind of company than the current cloud darlings (yes, like Shopify). They’re fairly steady and have been generating growing cash flow over the past couple years, but any guesses about huge top-line growth being above 10-15% are far outside the current expectations of investors. Every company has to be evaluated on its own merits, of course, but in general technology investors want to see a ‘growth’ mentality, with the company pouring cash flow back into sales or R&D to accelerate the top-line growth prospects — which means that a slower-growth story that pays out a lot of its excess cash flow in dividends often has trouble capturing investors’ enthusiasm. The dividend is a good sign that the company sees the business as steady and profitable, but not that they see a huge opportunity to take over the world.

I haven’t looked into the details very closely just yet, but I come away from my first read-through thinking that it’s an appealing company with a fairly steady growth profile, and it’s pretty clear that the annualized recurring revenue (ARR) has picked up a little bit, which is appealing, and that the strength in their enterprise and government sales has been growing steadily for years even though the education market, which is about a third of sales, has been flat or declining (at last until the past two quarters, when it picked up nicely).

Maybe it’s a quietly growing giant, maybe it’s just a stagnant older technology provider that picked up enough growth during the pandemic to get investors temporarily excited, maybe the truth is somewhere in between those two possibilities. The stock has roughly doubled since the pandemic began, and the Motley Fool Canada has been posting pretty enthusiastic free articles about it for about eight years now. And it has done well since their first free article in 2013, but only for the patient — this is the total return for ABST since then, compared to the TSX 60 (orange) and the S&P 500 (red):

Analysts expect that Absolute’s current fiscal year (which ends in June) will be pretty flat, with earnings per share dropping a little and revenue up a couple percent, and that growth over the next couple years will pick up, with roughly 13-14% revenue growth and similar growth in earnings. Most of those analysts call it a buy, and have price targets about 30% above where the stock stands today. The stock trades at about 70X forward earnings estimates, which is obviously on the steep side… but, well, it’s at least a lot cheaper than Shopify (200X forward earnings, 47X sales).

You can check out the Investor Presentation from Absolute here… I come away from my first run-through of this story being reasonably impressed, particularly with the acceleration in ARR during the pandemic year (it was growing at 5-7% pre-pandemic, but picked up to 17% by last quarter), and with the solid margins through that growth period which indicate they probably weren’t over-spending too much to get the growth going.

Whether or not that continues post-pandemic, I can’t tell you, and I haven’t dug into the details of the filings or conference calls to get a better handle on how they’re boosting growth or even what the basic product offering entails… but they did an equity offering late last year, so are pretty well cashed-up fro the immediate future, they have reset their recurring revenue to a slightly higher level now, and they do pay a decent dividend and can pretty reasonably afford to cover that dividend, so there are worse ideas. I don’t understand the business well enough to rush to jump aboard the Absolute train here, but it’s probably worth a deeper look if you’re so inclined.

Compared to most of the rest of the software world, the valuation at 5X annualized recurring revenue looks downright cheap — even if they are only growing at 10-15%, so unless there’s some dramatically better product out there in this niche that can just destroy them (I don’t know), the risk is probably mostly that the growth drops back down to single digits, where it was for many years pre-2020.

I don’t know enough to guess at how likely that is, but I suspect that the likeliest risk for investors is a bad couple quarters, a loss of sales momentum with annualized recurring revenue growth falling below 10% again, and a drop for the share price back down to the $6-8 neighborhood, where it was supported by the strength of what was a 4-5% dividend yield for several years before 2020’s growth (the dividend payout has been unchanged for five years, in case you’re wondering). The biggest daydream is probably that their ARR keeps accelerating, even mildly, and they trade up to a more enthusiastic “Cloud” valuation of 10-15X sales, which would drive the price up by anywhere from 100-200%. It’s a small stock, with a market cap well below a billion dollars, so a little attention can go a long way in driving the shares up… and, of course, the opposite is true if that attention fades.

I’ll leave you there, dear friends — sound like your kind of stock? Ready for a steady grower that pays dividends, or do you see reasons why that growth might fade? I imagine some folks out there in Gumshoedom know much more of the history of this one, so please do feel free to share your wisdom with a comment below. Thanks for reading!