After Surging 20%, Will This Small-Cap Tech Stock Deliver More Returns?

More Upside Ahead in Zix Corporation Stock?

“When more investors notice the potential of this e-mail security firm, its stock could get a lot more expensive.”

That’s what I told Profit Confidential readers about Zix Corporation (NASDAQ:ZIXI) earlier this year. In that piece, I explained why ZIXI stock, which was trading around $6.00 per share, could have “serious upside potential.”

I hope you took advantage of that article because today, Zix stock trades at $7.24 apiece, marking a return of over 20%.

But the opportunity might not be over just yet. Based on what the Dallas-based company has been doing, investors of this tech stock could be further rewarded.

Let me explain.

Zix Corporation Overview

Zix is in the e-mail security business. The company’s history can be traced back to 1988. Today, it offers a wide range of cybersecurity solutions, including e-mail encryption, data loss prevention, advanced threat protection, and mobile security.

With a market capitalization of  $388.6 million, Zix Corporation is considered a small-cap stock. Still, the company has built a solid presence in the cybersecurity industry.

Every day, the company helps encrypt and deliver more than 1.5 million e-mails.

Among its customers are U.S. Federal Financial Institutions Examination Council (FFIEC) regulators, divisions of the U.S. Treasury, the U.S. Securities and Exchange Commission (SEC), 30% of U.S. banks, and more than 1,200 U.S. hospitals. (Source: “Customers,” Zix Corporation, last accessed October 2, 2019.)

One of the main reasons I liked ZIXI stock earlier this year was the fast-growing nature of its business. With so many phishing e-mails, malware and ransomware going around, companies large and small are investing heavily in technology to protect themselves from cyberattacks. In particular, securing e-mails has been a priority.

And Zix stands ready to capitalize on the increased cybersecurity spending.

That means the growth theme is still valid. Just take a look at Zix’s latest earnings report and you’ll see what I mean. In the second quarter of 2019, the company’s revenue surged 162% year-over-year to $45.9 million. (Source: “Zix Reports Second Quarter 2019 Financial Results,” Zix Corporation, August 1, 2019.)

A lot of the top-line growth in the most recent quarter was due to the integration of AppRiver, a cloud-based cybersecurity solutions company that Zix acquired earlier this year. On an organic basis, Zix and AppRiver achieved year-over-year revenue growth of 15%.

Zix Runs a Recurring Business

What’s even better is that Zix Corporation’s business is recurring.

You see, in the tech world, there’s no shortage of companies with double-digit revenue growth rates. But what investors don’t know is whether those companies can keep earning that kind of revenue in the quarters and years ahead.

Sometimes, sales can be strong when a tech company releases a new product, but if customers don’t purchase it repeatedly, the company’s potential will be limited.

Stock market investors are forward-looking. They want to own shares of companies that can not only generate good revenue, but do so repeatedly.

The good news is, instead of making one-time sales, Zix runs a subscription-based business. According to the company’s latest investor presentation, Zix achieved net dollar retention of over 100% in the second quarter of 2019. (Source: “A Trusted Leader in Email Security,” Zix Corporation, last accessed October 2, 2019.)

During the reporting quarter, the combined company’s overall organic annual recurring revenue growth was 17%.

Zix Corporation Is Already Profitable

The best part is, unlike some startup tech stock that reports losses quarter after quarter, Zix is already profitable.

In the second quarter of 2019, the company earned an adjusted net income of $0.11 per share, representing an impressive 51% increase from a year ago. (Source: Zix Corporation, August 1, 2019, op. cit.)

Looking back, we see that Zix Corporation has achieved profitability for eight consecutive years.

And the best could be yet to come. Seeing the company’s solid financial performance, management decided to raise its guidance.

For full-year 2019, they now expect Zix to earn $170.0 to $172.0 million of revenue, which would be an increase of 141% to 144% from 2018. Adjusted earnings are projected to come in between $0.44 and $0.46 per share, which would mark a sizable improvement from the $0.33 per share earned in the previous year.

Zix Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

Put it together and you’ll see that this small-cap tech stock is something special.

The company not only churns out very impressive growth rates, but also manages to earn a recurring stream of revenue. Add in the fact that Zix Corporation is already profitable and I’d say there’s still a lot to like about ZIXI stock.