Transcription
Hey everyone. Welcome back to Chip Stock Investor. Hey everybody, this is Nick, and the other voice you just heard is Kasey. You'll see our faces here in just a second if you're worried about that, actually not till the end. Sorry everyone, you're gonna have to listen to our AI generated voices until the very end. AI trash as someone recently commented. Thanks. Thanks. Internet. You're you're very, you're very gracious.
Alright. For today's presentation, we're gonna be talking about Rubrik, and this is this subject we discussed on one of our recent live events and we've been having a lot of discussions about cybersecurity and so-called browser wars. Yeah, check us out over on Semi Insider for all of our research and those weekly live events and q and a sessions, including one we have coming up later this month on quantum computing. Check it out@chipstockinvestor.com.
The goal that we have with this is to try to help you connect the dots between these different cybersecurity products and different identity products. How that pertains to Ag agentic ai, and how all of that fits in with the browser wars that we have referenced a couple of times now, but specifically, when we did Palo Alto Networks a few weeks ago. So let's get started with Rubrik, which we covered for the first time back in June. And we have another earnings update from Rubrik that came out on Tuesday. We're just gonna cover a few high level points and what we're looking at here with Rubrik, which hopes to be a very large competing cybersecurity platform with the other big platform players.
Rubrik provides security for company data and data backup, especially data residing in the cloud. And one important factor of all that, as Nick just mentioned, is protecting identities in all of these different products. And so there's gonna be a lot of overlap eventually, as this market grows to go from just cloud and data servers all the way to end point, and consumer security. And then you've seen this slide probably a number of times, three main parts of a network that need security. The computing portion where the logic chips are, the networking, where the information moves between different parts of data storage and to those chips, and then the storage portion where all that data is stored. And that's where Rubrik fits in.
Let's say you're asking an AI chat bot, to provide you a response, it is going to go through a bunch of operations and then go out and grab data via an API to come up with a response for you. And when it's doing that operation, it's accessing a different part of the data center. It's likely accessing a different set of software that operates the data. And so therein lies a potential, surface that a hacker could exploit and attack and extract data and otherwise, use it for some sort of attack that harms the company. So this is where Rubrik fits in, is protecting that data portion of the software's operation. And then also data backup, which is very important as well, because if you do have some sort of incident, there's data loss. You are gonna want backup of that data, especially if, if, you know, the bad guys have hacked it and they're doing like, let's say a ransomware attack, they've taken it away and they say, if you want your data back, pay us money. Well, if you have data backup, that can at least keep you in operation while you deal with that incident. So anyways, this is what they do.
There are a lot of competitors here. Rubrik is kind of a pure play for this data and backup though. But here's a list of all the companies they compete with and or have a partnership with. Specifically there on the bottom, the biggest three hyperscalers. And then we put that note on the manufacturing portion there at the bottom, Rubrik has a agreement with Super Micro computer. They historically have given, Super Micro, the software and Super Micro has loaded that onto servers, branded them as Rubrik servers and that has been the case for quite some time. But as Nick has just been speaking about, Rubrik is a software and cloud provider, so they're relying less heavily on their hardware. We'll talk about that I think a little bit more, but they have a partnership with like Pure Storage for instance as well. The hardware integration has really been key for Rubrik and in its expansion and in its growth rate, which we'll get to. So that's maybe kind of like on the left hand side of this chart here. A lot of their, partnerships that they have with different clouds, hardware providers. And then on the right hand side, some of their integrations with other cybersecurity platforms that don't do data identity management and data backup. So Palo Alto, Zscaler, CrowdStrike, Okta, and then Mandiant, they're on the bottom. Mandiant, it actually part of Google Cloud that, used to be part of a company called FireEye, Uh, if you were investing in cybersecurity in the 2010s, you probably know all about fire eye and that interesting little saga.
Which brings us to a couple of items that have happened in recent months since we did our initial look at Rubrik, our initial writeup on Rubrik. Yeah, this one was announced, at the end of June, acquiring the company Predibase. And this has to do with, again, Agentic ai. Yeah. just trying to make it as easy as possible for users, to make use of their platform. And so, you know, the very thing that they're trying to help protect with this agentic AI and the very complex software needed to operate, in AI Agent, Rubrik, also using those AI agents to try to make their platform more usable and it has been working this year, things have gone quite well. If you recall back to some of our early discussions on Rubrik, one item that held us back early on was the company was managing through migrating their business from more ongoing maintenance and product revenue to cloud-based subscription. You can see from this chart, especially fiscal year 2025, that's last fiscal year, they pretty much finished that migration. So things have gone very well. And then you can see on the right there, Q2 of fiscal year 2026, comparing it to Q2 of fiscal year 2025. Now that they've fully migrated over to the subscription model, they have done quite well continuing to grow their customer base and expanding with those customers. So this is all good stuff for Rubrik and we'll flesh more of this out, I guess, where they fit into the picture in the coming days.
But let's maybe just do a quick update here on financial guidance that the company just provided because it was quite good. Yeah, absolutely. I'll first start with the top on revenue growth, total revenue. They expect Q3 between 319 and 321 million, and then on the year, between 1.2, 1.23, and that implies a revenue growth of 39%, which is very good. And then if you think back, the guidance that they provided last quarter, the free cash flow, they actually doubled that outlook for the free cash flow for the fiscal year, now between 145 and a hundred fifty five, a hundred fifty at the midpoint. Significant improvement in free cash flow guidance. And so financial guidance is up, stock prices down a bit from the all time high. Let's just refresh the reverse DCF, what is baked into the stock price right now, given the new information and the new valuation of the moment. Free cash flow on a per share basis, which is actually pretty easy. can just calculate that from the previous slide. to estimate free cash flow per share for this fiscal year. you just wanna run it at the midpoint of free cash flow guidance. 150 million divided by 197 million expected average shares outstanding. So that's where we came up with the 79 cents. That's for this fiscal year. So that's guidance that runs through the next four or five months until the fiscal year comes to an end.
To get to a fair value today, after market hours, the stock was about $82, $83, uh, we ran the scenario, as such, we think most of their free cash flow margin expansion should take place over the next few years. Clearly as you can see, Kasey said the free cash flow guidance more than doubled from the previous quarter, so that's a massive hike to their free cash flow profit margin. So, the bulk of that margin expansion should take place in the next three years. So that's why we have this massive growth rate per share profit growth rate of 70% for the next three years. Back in June though, when we ran this, to get us to the price, which at the time was close to a hundred dollars per share, it was more like a hundred percent per share profit growth for about three, three and a half years. So it's been lowered now, just with this particular scenario. And then we also were able to lower the terminal growth rate, from six and a half percent down to 6%. That now gets us to a fair value where the stock is at right now of about 82 to $83 per share. So the bar has been lowered for sure. That's the good news. How low is the bar though? It's still a pretty high bar to clear. Agreed. But. It's a possibility.
Ultimately we expect a lot of volatility, even more than what is normal for the cybersecurity industry. And that volatility. You know, I think sometimes when we say volatility, it gets interpreted as downside for the stock. Volatility actually cuts both ways. It could actually be. upside volatility as well. so we would like to call that out. but this is kind of the norm for high value growth businesses like this, you always need to expect higher volatility, which could mean market under performance if you're dealing with smaller high growth businesses. So this kind of it brings us back to some of the discussion we've had in recent months about probabilities and making sure that your portfolio is set up in such a way that, the odds are working in your favor and not against you. So if you're looking at a company like Rubrik and you're thinking, Hey, this looks pretty good, this meets my criteria, uh, but you understand the risks. Um, if the growth rate slows down dramatically, if the profit margin expansion slows down significantly expect volatile downside. But if they surprise to the upside, their growth rate sustains for longer than expected, profit margins expand quicker than expected. There could be volatility to the upside. But the point is, if this looks good, you might add this as a small starter position as part of a well-rounded basket of other cybersecurity software platform companies don't put all your eggs in one basket, that could go against you. In fact, the odds more than likely will go against you. That's the kind of stuff that can get you in trouble. Everything looked awfully good for a Rubrik on this last earnings call. the stock price was just unsustainably high, at that particular moment in time, June, July, August when we did the initial writeup on the company after we kind of watched from the sidelines for a while. we did call it out in April as a timely stock to, take a look at. Hopefully, hopefully some of you maybe saw that and nabbed some.