Uncommon Idea: A Cloud Bridge and Buyout Candidate Gigamon GIMO

The Uncommon Idea in Brief

Buy Gigamon (GIMO) stock for the long-term turnaround potential with the possibility of a shorter-term takeover. (Published Sept. 3, 2017)

– Build a long position between $38 and $42. Add aggressively in the $34 to $36 range.

The Industry Opportunity

All the world is abuzz about the opportunities offered in the cloud. But the fact is many large companies still have substantial investments in and operate large existing infrastructure containing their own networks.

Shifting to the cloud is a process, not a flip of the switch. A transitioning firm opens themselves to new threats both in the cloud and within their existing networks. It’s an expensive and risky change. Using API cloud level monitoring or cloud flow logs don’t provide the same level of visibility that organizations are used to enjoying with their onsite installations.

What Does GIMO Do?

Gigamon is best known for networking monitoring products designed to work with physical network devices. A client’s network traffic is passed through a device, either copied or logged, then sent to a monitoring system. While the physical network is still Gigamon’s bread and butter, this system doesn’t work in the cloud where virtual machines are connected over virtual networks and run by software. Companies never see the physical network topology that connects everything.

Gigamon has introduced its Visibility Platform that enables a modern, secure infrastructure that delivers pervasive visibility into all the data-in-motion across an enterprise network: physical, virtual, private, hybrid and public cloud environments to bridge the gap between physical networks and virtual networks.

Recently, GIMO rolled out GigaVUE-HC3, a high-performance flagship appliance enabling pervasive visibility and security intelligence at scale in 10Gb, 40Gb and 100Gb networks. The solution enables IT and security organizations to:

– Optimize the utilization of security tools

– Achieve improved network and tool performance

– Gain deeper insight into, and awareness of, the data-in-motion, regardless of the throughput

Gigamon’s solution to the security challenges presented by the cloud is to deploy an agent on the host to forward on raw traffic to the existing toolset. The benefits of using cloud systems can be obtained without having to give up those existing systems, processes and knowledge.

The Uncommon Market Position That Sets Gigamon Apart

Gigamon’s shift away from a sole focus on communications network hardware appliances to security products able to function and support cloud platforms. That separates it from competitors.
With the ability to support products such as Amazon Web Services (AWS), GIMO is securing business in the enterprise market.

Gigamon’s Visibility Platform is now available in the AWS GovCloud, allowing public sector organizations to gain deeper and more pervasive visibility to manage, secure and understand sensitive data and regulated workloads running in AWS, enabling compliance with stringent federal operational requirements.

AWS GovCloud is a specific region of the AWS Cloud designed for U.S. government organizations hosting proprietary data, such as sensitive patient records, financial data, personally identifiable information (PII) and other controlled unclassified information (CUI).

Gigamon Visibility for AWS GovCloud enables the public-sector organizations to strengthen their cybersecurity posture across physical, virtual and cloud environments and adopt the cloud.

Financials – Gigamon’s Transition and Resurgence Continues

Despite annual growth of 40% on revenues to finish the 2016 year, top-line numbers of $69.1 million in revenue for the second quarter of 2017 were relatively flat compared to 2016. The company did produce a non-GAAP earnings per share of $0.10 on $4 million in net income. On a GAAP basis, GIMO lost $0.20 on a net loss of $7.3 million. The company’s cash position of $258.8 million against no debt equates to a net cash position of almost $7 per share. Margins remained strong at 81% and 82% on a GAAP and non-GAAP basis respectively.

While revenue results were in line with guidance, earnings per share exceeded previous guidance due to lower operational expenses than planned. Management expects a stronger second half of 2017 as the company’s pipeline has reached a record level of $500 million. During the quarter, 16 customers had bookings more than $1 million. Management points to continues strength in GIMO’s flagship GigaVUE-HC2 product and significant pipeline for the new GigaVUE-HC3.

Gigamon was selected to the Forbes Fast Tech 25 for 2017. Joining Gigamon (No. 9) on Forbes Fast Tech 25 for 2017 are companies including Facebook (FB) (No. 2), Salesforce.com (CRM) (No. 13), Amazon.com (AMZN) (No. 19) and Alphabet (GOOG) (No. 25).

The Technical Analysis – On a Breakout Over $44 or Pullback to $38 to $40, GIMO Is an Optimal Technical BUY

GIMO, Gigamon, chart, technical analysis
Click for a larger image.

Gigamon’s shift from hardware security to crossover has resulted in some strains on the charts. Between December 2016 and February 2017, price was cut in half. Shares have rebounded, largely due to the recent involvement of Elliot Management, but this is still a departure from the norm as we often focus on buying strength rather than weakness.

Our focus is on the post-Elliot action, which pushed shares off the May 2016 lows and into this current trading channel. The $44 area has established itself as initial resistance with a very slow rising support level now measured at $38.

This setup provides two entry options: buy the breakout or buy a successful test of support.

A weekly close over $44 appears as the most likely trigger, although shares appear buyable here without the trigger. Price resistance looks minor, at best, as the recent trading volume above $43 is minimal. Plus GIMO is demonstrating both strong momentum and trend as shown by the moves higher in the Full Stochastics and Stochastics RSI’s overbought status. There is no technical resistance level above $44 until we reach $52, our initial upside target.

A secondary approach is to buy a successful test of $38 where the stock does not close under the $38 in consecutive weeks. This becomes range trade where you would expect the stock to move between $38 and $44 in a gentle, rising fashion. A trader entering in this fashion must ironically consider selling if shares hit $44, but fail to close above that level. At the very least, a trailing stop or partial profit trade should be considered.

Volume has been below average since the April earning release and the May acknowledgement of Elliot Management’s stake, but the bigger volume weeks have occurred during moves higher, which can be interpreted as a longer-term bullish sign. Another uptick in volume would be preferred on a continued move higher in price.

Should the $38 level support fail, we’d anticipate a new consolidation channel to develop between $32 and $36. Unless news hits that the company has no interested buyers and activists leave the name, we’d be aggressive buyers in this area.

Catalysts for the Thoughtful Investor on Why Gigamon is a Buy

There’s a strong pipeline, plus an activist pushing to uncover perceived value in the Gigamon. Management noted the strength of the current pipeline should create a strong second half of 2017, but when given the total pipeline, business appears strong into 2018. The company grew its pipeline $100 million sequentially thanks to a recovery in security spending along with interest in new products. The total pipeline now stands at more than $500 million. It’s no wonder activist investors are interested in the company. Dave Thomas of Atalan Capital Partners recommended GIMO at the Sohn hedge fund conference in New York earlier this year while, Paul Singer also thinks the company is undervalued.

Singer’s Elliot Management disclosed a 15.3% stake in GIMO that it began acquiring in March 2017. In an SEC filing, Elliot noted share as significantly undervalued and represent an attractive investment opportunity. Since that time, Gigamon has hired Goldman Sachs to begin talks with companies and private equity firms interested in a deal to buy GIMO.

Needham analyst Alex Henderson believes potential acquirers include old-guard tech giant Cisco Systems (CSCO), networking vendor Juniper Networks (JNPR), enterprise IT leader HP Enterprise (HPE), Dell/EMC (EMC), Palo Alto Networks (PANW) and Fortinet (FTNT) as potential buyers. Private-equity firm Thoma Bravo has also been noted as a prospective bidder. The firm owns San Francisco-based Riverbed Technology, which bought out Gigamon rival Opnet five years ago for $1 billion.

HP Enterprise has eliminated several units since it separated from its computer and printer partner HPE making it potentially the hungriest of bidders and a solid fit. The company has been searching for way to boost demand for its core server and storage products. Gigamon, with its traffic monitoring and security software, would be a strategic fit.

In January, network security and software company Ixia was acquired by Keysight Technologies in a $1.6 billion deal, while competitor Opnet was purchased for $1 billion in 2012. With a current market cap of only $1.5 billion, along with stronger fundamentals and pipelines than either Opnet or Ixia held, we believe Gigamon could fetch $1.8 billion to $2 billion in a buyout.

The Bottom Line

1. Gigamon is the market leader for network monitoring products in physical networks and an emerging leader in the hybrid security space of enterprise systems shifting from a physical network to the cloud.

2. Gigamon’s first-to-market solution to deliver visibility in the AWS Cloud.

3. In the range of $38 to $42 we like GIMO as a long-term buy and hold. Over $45, we like GIMO as a momentum breakout long. The small-cap nature, short interest and activist involvement will make it volatile.

4. Paul Singer’s Elliot Management has taken a substantial 15.3% stake in GIMO.

5. Gigamon has retained Goldman Sachs to begin talks with companies and private equity firms interested in a deal to buy GIMO.