Description

Summary:

Rubrik is poised to dominate the security-aware cloud data backup market. Their unique approach combines cybersecurity with cross-cloud immutable data backup, enabling swift recovery from ransomware attacks and data loss. Despite trading below its IPO price due to current market sentiment against software stocks, Rubrik's strong fundamentals and growth potential make it a compelling investment opportunity.

The stock is trading below its IPO Price ($32) and is trading like a broken stock as there is a general aversion to software stocks right now, specially for a new company without a history as a public company. I expect the stock to double over the next 3-years and be a 5x in the next 10 years for a 10 year IRR of over 20%. It will be a volatile stock and you should size appropriately. The stock will follow the path of stocks of software companies such as MDB,NOW, CRM, WDAY, DDOG and CRWD - all dominant in their respective verticals. 

S1: https://www.sec.gov/Archives/edgar/data/1943896/000119312524083525/g359771g00g11.jpg

Management team:

Rubrik's founders, Bipul Sinha and Arvind Jain, are part of a successful network of IIT graduates with a proven track record in the tech industry.

https://www.forbes.com/sites/alexkonrad/2024/04/25/rubriks-56-billion-ipo-is-latest-win-for-the-iit-mafia-a-group-of-indian-engineers-turned-ceos/

Bipul was the seed/Series A investor in Nutanix and sat on the Board while he was a partner at Lightspeed. Arvind had an iconic career at Google and left Rubrik (after vesting) to start Glean - which is dominating enterprise AI search. One of co-founders of Nutanix (Mohit Aron) left to start Cohesity (more on it in the competition section), which was acqui-merged with Veritas for over $2.7B recently. 

Bipul grew up in a poor family in one of the poorest states in India (Bihar) and his success is a testament to his intellect and work ethic. We have common friends and I have heard positive things about him. I also know some of the early employees of Rubrik who can’t stop raving about his work ethics. He is exactly the kind of founder you want to back in tech - a smart and cut-throat competitive guy with a fire under his a$$. 

Business Overview

Rubrik's cloud-native platform offers a comprehensive data security suite built on a zero-trust architecture. This innovative approach ensures data immutability, protecting businesses from evolving cyber threats. The company's high net retention rate, driven by a pricing model based on data volume, reflects strong customer satisfaction and the expanding need for data security solutions.

The business has  a high net-retention rate (over 130%) as the service is priced based on the volume of data that is being backed up and the total volume of data within  enterprises has been and will keep growing at a steady clip. Splunk was one of the first companies to successfully price their product this way and it worked extremely well.  CIsco recently acquired Splunk for over $28B (a bad acquisition IMHO as the SIEM space has cheaper and better alternatives now including ESTC). Cisco stopped making good acquisitions after Chambers retired. But I digress. 

An important  driver of value in software companies is Gross Retention, a metric that is often overlooked by growth investors who use inadequate valuation metrics such as EV/Sales/Growth multiples to assess relative value.  Look at the divergence in the performance of RingCentral vs WorkDay after the 2021 bubble burst - entirely due to the difference in gross retention of the two companies.  RNG’s low gross retention finally caught up with them. Gross retention directly impacts the exit EV/Sales multiple (implied by a 20x P/E multiple) that a growth investor should pay for these high-growth companies assuming you are willing to look out 7-10 years. This is the multiple the business deserves post its hyper-growth stage.  The best software companies with 90%+ Gross margins and 95%+ Gross retention can easily trade at 10x EV/Sales exit multiple (MSFT, ADBE).

Rubrik is the middle of the pack when it comes to gross retention (significantly lower than a Workday at 97%, but significantly higher than a RNG at 60%). Backup software doesn’t have as many levers to create stickiness as NOW or WDAY, but prior precedents (Veritas, Commvault) suggest a gross retention of over 90%.  Rubrik claims that is 90%+ but it is hard to say as they don’t have a 10 year history to support the implied 10+year life of a customer.

The single biggest risk to my long case is lower Gross Retention, which can be below my expectations if  another company comes along with a better product. The odds of that are low as Rubrik is redefining the space and investing significantly in R&D. Category leaders are established during technology transitions because they have the best technology, and Rubrik has emerged as the clear Gorilla. In the worst case you end up with a two player market similar to Palo Alto Networks and ZScaler for Cloud Firewalls. In Tech, these cycles easily last 20+ years (Veritas is still in business despite being around since 1983). We are early in this transition - Rubrik’s cloud product didn’t take off until 2020.

The chart below shows Goldman’s estimate of LTV/CAC. Based on their estimate, Rubrik is in the middle of the pack. I believe that this metric will improve because Rubrik’s CAC will decline. They are still honing the sales motion post the transition to a subscription model in 2020/2021 and have a lot of low hanging fruit especially when it comes managing their  distribution partners. They should comfortably be over 3x - better than leading players like  WDAY and ZS.

Rubrik started by selling appliances with a subscription tied to it. In 2020 it switched to a cloud solution, which is now the primary product that they sell. These transitions always results in duplication of sales and support costs and as we reach the end of the transition, we should see a significant improvement in CAC.

Market Opportunity and Competitive Position:

 The recent ransomware attack on the systems of United Health that  took multiple weeks to fix and paralyzed their provider payments system epitomizes the need for Rubrik’s solution. Traditional backup systems won’t cut it and companies will look to incorporate business continuity in their evaluation process. 

https://www.cbsnews.com/news/unitedhealth-cyberattack-change-healthcare-hack-ransomware/

The incident with UniSuper, where GCP accidentally deleted all of their data shows the need for cross-cloud backup.

https://www.ai-cio.com/news/google-cloud-accidentally-deletes-australian-superannuation-funds-data/

The data backup and recovery market is projected to be $11 billion as per GS. I think that is too low and TAM will expand as two concerns I laid out increase awareness of the importance of security-aware multi-cloud backup. 

At the time of IPO Rubrik had 1742 customers who were paying more than  $100K/year. 99 customers who are paying more than $1M/year and a total of only  6000 customers. The $1M threshold is an important marker as very few tech companies are able to break that level. Now let’s compare that with some other leaders.  

ServiceNow has 1,933 customers with ARR exceeding $1 million and 100 customers who spend more than $10 million annually​.  Datadog has approximately 26,600 customers. Additionally, Datadog has reported that it has over 3,500 customers with an ARR of $100,000 or more, and it has 350 customers with an ARR of $1 million or more​. Veritas Technologies, the traditional backup leader, has over 80,000 customers worldwide. 

Rubrik can 5x revenue over the next decade as long as it maintains its leadership position.

COhesity, the closest competitor (founded by one of the co-founder’s of Nutanix) has seen growth slowdown sharply to under 25%/year on a smaller revenue base (sub $400M). They have merged with a dying old backup solution called Veritas that provided data backup solutions for traditional data centers. In my experience, two companies that are losing market share don’t make good partners. Investment Bankers make a good pitch that there are synergies to be had by cross-selling into the installed base of Veritas,  most customers will pick a new cloud backup vendor without running a bake off. 

Veam is older technology and wasn’t designed to be security aware. It started as a nice solution for backing up virtual machines (primarily VMWare VMs) and has since expanded into a full-fledged data-backup solution. Veam’s growth has also slowed down.

Compared to competitors like Cohesity and Veeam, Rubrik's superior technology and growth trajectory position it as the leader in the emerging security-aware cloud backup space. This aligns with the principles outlined in the book "Gorilla Game," which emphasizes the importance of investing in category-defining companies with strong competitive advantages.

Comps:

A simple Ev/Sales or Ev/Sales/Growth multiple is rudimentary way to look at valuation, specially using comps with different gross margin, retention and long-term R&D costs - which is what most sell-side and investment-banking analysts do. I prefer to think of the right multiple in the context of Gross Retention and Gross Margins and an exit multiple of 17-20 P/E after the hyper-growth phase of a company is over. The period where organic revenue growth is over 15% is the hyper-growth period.   Based on Rubrik’s target of 75% GM and 90%+ Gross Retention, you can justify a 4X EV/Sales exit multiple (translates into 25% operating margin and a 20x P/E). 

Valuation Framework 

Rubrik should do $2.5-$3B in revenue in 2029 and should still be growing somewhere between 15-20%/year at that point which deserves a 4x EV/Sales multiple at the low end and 5x  for my base case. 

How do I get to that level of revenue? By thinking through Net Retention, sales productivity and TAM and the fact that Rubrik is taking share from everyone. (FInancial year ends in Jan - 2024 below corresponds to Financial year ending in Jan 2025 - I used the calendar year to make it easier).

Risk/Return:

It is very hard to see any fundamental downside from the current valuation. 

Glasdoor Reviews: They are at 3.9.  I like to see Glassdoor reviews of over 4.0. However, if you closely look at the negative reviews (mostly 1 stars), you will get a sense that it was from disgruntled employees due to Rubrik’s policy to grade people on a curve. You can’t cost at the company and that is a good thing. 

Competition: The space is competitive and I might be wrong on the  Cohesity+ Veritas forced marriage. Veeam continues to do well. However, the market is large enough to support multiple players. Look at APM, where you have at least 4 big players, or SIEM which also has 3-4 large players. 

FCF Burn: Rubrik is not projected to achieve FCF breakeven until fiscal year 2026, potentially extending its path to profitability

Slower Adoption: If the adoption of next-generation backup and recovery solutions lags, Rubrik's addressable market opportunity could be limited

Why does the opportunity exist?

General aversion to software stocks right now, specially for a new company without a history as a public company.

Catalyst

Consistent Revenue Growth