Investment Idea: SolarWinds Corporation (SWI)
SolarWinds Corporation (SWI): Investment Idea
1. Executive Summary
We initiate coverage on SolarWinds Corporation (SWI) with a BUY rating. We believe the company is undervalued given its robust portfolio of IT management solutions, strong focus on recurring revenue streams, and potential for margin expansion driven by streamlined operations and disciplined spending post-security incident.
2. Investment Thesis (Bull Case)
SolarWinds offers a comprehensive suite of IT management software critical for organizations to monitor, manage, and optimize their IT infrastructure. Several factors support a positive investment outlook:
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Essential Software for IT Management: SolarWinds' products, including network management software providing real-time visibility into network utilization and its infrastructure management products monitoring application performance, are essential for IT professionals. This creates inherent demand and supports recurring revenue.
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Shift to Subscription Model: SolarWinds is strategically focusing on subscription-based models. This shift provides greater revenue predictability and long-term customer value, fostering stronger relationships and increasing lifetime value. Subscription revenue now comprises a significant portion of total revenue and is expected to grow.
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Post-Incident Recovery and Operational Improvements: The company has made significant strides in enhancing its security posture and streamlining operations following the 2020 security incident. Disciplined cost management, coupled with renewed customer confidence, positions SolarWinds for margin expansion.
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Opportunity to Win Back Customers and Capitalize on Secular Trends: The incident, although damaging, now provides an opportunity for SolarWinds to showcase its enhanced security measures and win back lost customers. The company can also capitalize on secular trends like increasing IT complexity, cloud adoption, and the need for comprehensive security solutions.