Imagine the following situation: a cyber security company is preparing a prospectus for NASDAQ in which it reports on contracts with a total expected volume of 500 million dollars from leading businesses around the world that have actively chosen this promising Israeli company’s technology solutions.
In its prospectus, the company presents a conservative estimated valuation based on a revenue multiple of 10.7, with the average multiple for similar companies on NASDAQ currently at 14.2.
Clearly, this is cause for celebration – right? An outstanding Israeli funding success with a “modest” IPO – to look at it in American terms – which within just five years could lead to an Israeli company being sold off to the Pentagon, Johnson & Johnson, Visa, or Boeing at a value of about a billion dollars on NASDAQ.
The gap in valuation
So what went wrong in the real world? HUB Security is a public company in Tel Aviv, and the sleepy securities market in Israel can’t quite fathom the gap in valuation between these securities, probably because it’s not used to genuine success stories.
Outside of Israel, on the other hand, the deal was closely advised by investment bankers from Oppenheimer, a company employing nearly 3,000 people in 92 offices all over the world. Oppenheimer, known as one of the world’s 40 best investment banks, valued HUB Security at around 1 billion dollars after actualizing the holdings through a special purpose acquisition company (SPAC) putting the post SPAC share price at around 10 dollars a share.
The share price reflects a multiple of 14.2 on 2024 revenue of about 263 million dollars since by the valuation method used in the US, share price is always calculated based on revenue for the following year. According to this calculation, HUB’s valuation should be even greater, at around 3.6 billion dollars or about 36 dollars per share. Whether you agree or disagree with the numbers, this is how Wall Street tends to value companies throughout most of the Western world, and HUB is no exception.
At the same time, the primary and binding document for every IPO is the public prospectus. This document, which is the “holy of holies” for financial transactions, contains all relevant details about the company and the transaction, making any false or misleading claim in this prospectus constitutes a civil and criminal offense in the US. The income forecast for HUB Security, along with the fact that it currently holds 500 million dollars in signed agreements to provide its secure data center technology, are all laid out in the full prospectus.
Strategic players surveying the prospectus have discovered a reality that doesn’t reflect the share price in the Israeli market. HUB Security is expected to already bring in 173.6 million dollars by 2023, and a total of 889.1 million dollars by 2025, for a total profit (operational profit factoring in EBIDTA -depreciation) by the end of 2025 of 162.8 billion dollars.
It’s fair to say, therefore, that US investors actually see a company worth 36 dollars a share, based on multiples for benchmark companies, which will be traded for 10 dollars a share, with a potential upside, assuming that the growth in income and profit play out as expected, with existing contracts providing coverage for at least two years’ advance on income forecasts (as opposed to pipeline forecasts, which consider unsigned agreements still in various stages of negotiation).
The company’s valuation is based on the numbers reported in the public prospectus, and these reflect a bland, technical valuation of only the profit multiple and expected company transactions over the coming three years – reporting which is extraordinary in and of itself, given the way it highlights the solidity of the company’s existing contracts and business relationships.
What isn’t in the prospectus? For obvious reasons, it can’t contain market growth in the core fields in which HUB Security operates, primarily encrypted computing, which is expected to grow by between 40-95% by 2026 according to market researchers. HUB Security’s core fields also provide its greatest expected income. Among the 500 million dollars in signed contracts already held by the company, 80 million dollars are for the coming year alone.
What strategic investors see
All of which raises the question: What do strategic investors who follow Oppenheimer see in this deal? It all comes down to a simple point: Anyone investing in HUB Security at a value of 10 dollars a share is someone who believes that, based on the company’s prospectus, it potentially stands to grow over 30 dollars a share over the next two years. So why aren’t investors buying it in Israel already for 2 dollars a share? Because that doesn’t reflect the reality for Israeli institutional investors looking to buy 10 million dollars or more in a company.
Based on an analysis of activity cycles for HUB Security shares over the last year, any such demand for a share-block from a single investor would cause the shares to jump by tens of shekels, such that the investor wouldn’t be able to buy those shares. And when you recognize that we’re not talking about a single investor but rather dozens of potential institutions, buying on the Tel Aviv Stock Exchange in the kind of volume that interests institutional investors is simply impossible.
And perhaps, with a critical and consistent reading, we can also identify another pattern, darker and more concerning. Over the last two years, HUB Security has shown yields of 114% to shareholders in Israel and yields of about 50% over the past year. These facts, which position HUB Security as one of the five most profitable Israeli stocks for 2022, along with its relatively large short interest, raise the question of whether there aren’t unreported outside factors driving a systematic backlash against the company.
One way or the other, HUB Security has recently reported that it has met all the conditions for a NASDAQ Listing, and announced that the company will begin trading in New York on February 28 at 4:30 p.m. Israel time (9:30 a.m. Eastern time). So we’ll just have to wait and see.