Rubrik: Backup To Cyber Defense, At Too Rich A Price (NYSE:RBRK)

Investment Thesis

Rubrik (NYSE:RBRK), a recently IPOed business, is less enticing than it seems. On the surface, the business appears to be amongst the cheapest cybersecurity plays around. Despite guiding for about 35% CAGR, its valuation doesn’t seem stretched.

But as we go through and unpick some details, I find myself very much on the fence here. Crucially, its growth rates are rather volatile, making extrapolating its medium-term growth rates a challenge.

Given this uncertainty, I argue that in the best case, this stock is already fairly valued.

Why Rubrik? Why Now?

Rubrik seeks to secure data against cyberattacks. They have developed the Rubrik Security Cloud, a platform built with Zero Trust principles, which means it assumes that all systems can be compromised and requires strict verification before granting access. Rubrik Security Cloud protects data across various environments—enterprise, cloud, and SaaS applications—and uses artificial intelligence to detect and respond to threats. By integrating backup, recovery, and cybersecurity into one service, Rubrik aims to help organizations quickly recover from attacks and maintain continuous data availability.

Rubrik’s value proposition lies in its unique approach to data security and resilience. Traditional cybersecurity methods often fail to address data recovery following cyberattacks, while legacy backup solutions focus on operational recovery rather than security.

Rubrik combines these elements, offering a comprehensive solution that not only protects data but also ensures its rapid recovery after an attack. This integrated approach helps organizations enhance their security posture, reduce the risk of data loss, and support ongoing digital transformation efforts. As businesses generate more data, Rubrik’s platform becomes increasingly valuable, providing stronger protection.

Contrasting Rubrik with SentinelOne (S), the primary difference is their focus. Rubrik specializes in data security and recovery, emphasizing the protection and restoration of data after cyberattacks. Their Zero Trust Data Security model is designed to secure data across all environments, ensuring a quick recovery.

As a brief contrast for our later discussion, consider that SentinelOne focuses on endpoint security, using AI to detect and respond to threats at the device level. While SentinelOne stands out in preventing breaches and protecting individual endpoints, Rubrik offers a broader solution that includes data backup and recovery, making Rubrik ideal for organizations seeking to safeguard and restore their entire data landscape after an attack.

Given this background, let’s now delve into its financials.

Revenue Growth Rates Are Volatile

Rubrik’s revenue growth rates for this fiscal year look rather enticing. Against a backdrop when many IT departments are looking at what expenses they can reduce, in an effort to cut back on excess costs, Rubrik is plowing ahead with more than 35% CAGR expected this fiscal year.

What’s more, here we are not talking about small revenue figures. On the contrary, as a point of reference consider that Rubrik is guiding for an ARR of nearly $1 billion, which is very likely to be in line with that of SentinelOne, a stock that I’m long and recommend.

But the devil is in the details when it comes to Rubrik. In fact, the reason why Rubrik is able to point towards more than 30% CAGR this year, and perhaps able to deliver a 35% y/y increase on its topline, is because the previous year its revenue growth rates were rather paltry, see graphic above.

More specifically, given that its revenue growth rates are so volatile, I don’t believe that this stock should be rewarded with a high multiple, comparable to that of SentinelOne or other ”fast-growing” SaaS stocks. Something we discuss in more detail next.

RBKR Stock Valuation — 6x This Year’s Sales

Rubrik has a net debt position of approximately $700 million once we factor in its convertible debt. So, the business has limited flexibility as it goes about its land grab strategy.

Furthermore, the subscription side of the business alone, not including its maintenance and other revenue streams, is expected to end fiscal 2025 with approximately negative 10% operating margins.

So, to summarise the setup, you have a business with volatile revenues, an inflexible balance sheet, and an unprofitable platform. And for that, investors are asked to pay 6x this year’s sales?

I earnestly struggle to see the appeal. Case in point, for 7x sales, I can buy SentinelOne, which is guiding for about 31% topline growth, after years of delivering super strong growth rates and having tough comparables with the prior year, with a balance sheet that I believe will end this year with no debt and $1 billion of cash, plus a business that is at breakeven by the end of this fiscal year.

The Bottom Line

Despite Rubrik’s innovative approach to data security and its projected 35% CAGR, investing in the company at 6x forward sales isn’t compelling enough. The primary concerns are its volatile revenue growth rates, which make it challenging to predict its medium-term performance accurately.

Additionally, Rubrik’s balance sheet reveals a net debt position of $700 million, limiting its financial flexibility, and the company is expected to end fiscal 2025 with negative operating margins. Given these uncertainties and financial constraints, the current valuation seems fair at best.

In conclusion, I’ll stick to the sidelines here.