Tech Firm's Success Is No Secret

Focus: STOCKS

Marc Gerstein Image Marc Gerstein Editor, Forbes Low-Priced Stock Report

This stock has had its challenges, but it still has a lot of headroom in its sector, reports Marc Gerstein of Forbes Low-Priced Stock Report.

Many investors are skeptical of companies that are supposed to be able to grow into high stock valuations, but it doesn't happen. Zix Corp. (ZIXI) is a good example.

The company, which focuses on cloud-based e-mail encryption services sold to enterprises on a subscription basis, was last featured on September 15, 2010. I said back then that valuation was iffy, but observed that “with sales growing and an ongoing crossover into profitability and cash-flow generation, this shapes up as a legitimate growth play.”

With small stocks more volatile than usual over the past two years, as the market wrestled with one macro issue after another, there was little investor enthusiasm for a tomorrow-oriented growth play. So the stock more or less stayed in place, trailing the Russell 2000, which now stands about 30% higher.

But since that time, the company has delivered: Revenues rose, and operating income in the 12 months ended June 30 was more than double the 2010 total. The stock now sells for about 18 times trailing 12-month operating EPS (i.e. excluding unusual tax benefits), meaning that valuation is now a no-worse-than-neutral investment factor.

Quarterly year-to-year revenue growth lately been about 10% to 12%, but with prospective buyers having become more informed regarding e-mail security protocols, Zix—whose competitive differentiator is the sophisticated capabilities of the solutions it offers—is now seeing a strong pickup in new orders.