Home Enterprise holdings ZeroFox Stock: Not All SPACs Are Bad (NASDAQ: ZFOX)

ZeroFox Stock: Not All SPACs Are Bad (NASDAQ: ZFOX)



The ZeroFox Holdings (NASDAQ: ZFOX) The SPAC agreement with L&F Acquisition Corp. just closed in August and the stock is already trading well below $10. Not all SPAC deals are awful, with ZeroFox having a strong cybersecurity business model. my investment thesis is neutral on trading stocks at a steep discount to the SPAC price of $10, but the company needs to better explain the update Estimates for FY23.

Finviz Chart

Source: FinViz

Enterprise Cybersecurity SaaS

ZeroFox is a leader in enterprise cybersecurity. The company is focused on external threat protection and response capabilities to protect enterprises against the entire lifecycle of external cyberattacks.

All businesses are in the midst of digital transformations, but these changes expose businesses to external security threats. It’s all in the cloud and accessible via mobile, along with social media and remote working, allowing a business to operate far beyond traditional corporate walls.

ZeroFox uses computer vision and machine learning powered by 20 AI patents to attack the problem at its source. All digital platforms, from social media to e-commerce and digital currencies, are used to transmit malicious payloads.

The company has a blue-chip customer base and forecasts 2022 revenue to reach $150 million and grow to $195 million in 2023. ZeroFox has strong retention rate and over 90% of revenue is SaaS model recurrent.

Financial presentation slide

Source: ZeroFox PSPC presentation

As with any cybersecurity company, ZeroFox is expected to achieve 70% gross margins with strong cash flow going forward. The company remains relatively small, but at least the goal is to be generally cash flow neutral at the start of public life, with a strong cash balance of $270 million.

Along with an SEC filing, ZeroFox lowered the revenue target for 2H’23 to a range of $82-86 million. The company blames the timing of growth investments due to a delay in closing the SPAC deal and the macro environment.

price break

ZeroFox had an initial net worth of $1.3 billion based on 139 million shares outstanding. The EV was closer to just $1.0 billion, and of course those amounts are before including the ~16 million warrants exercisable at $11.50 per share (far out of the money now) .

Deal presentation slide

Source: ZeroFox PSPC presentation

The stock was trading above $10 when the deal closed, but ZeroFox quickly dipped below $5. The stock has rebounded slightly now, but the new price is only worth $850 million for an EV/S multiple of just 3x now.

Unfortunately, many public cybersecurity stocks used by L&F Acquisition in the SPAC presentation of peer stocks fall into similar valuations after the big sell-offs. Okta (OKTA), Quick7 (RPS) and Sustainable assets (TENB) all fell around the multiple EV/S before 4x.

Data by YCharts

As a newly listed company and part of a SPAC deal, the market certainly won’t pay a premium for ZeroFox. The good news, however, is that these stocks are all providing strong values ​​from historic multiples where 10x forward sales were attractive.

Given that ZeroFox just closed the deal in early August and is newly public, investors are sometimes advised to watch the company from afar. The IPO process can cause management teams to lose focus and disrupt operations.

Along with closing the SPAC deal, ZeroFox discussed identifying 5.8 million attacks and escalating nearly 272,000 serious or critical customer incidents. The company saw a 125% increase in external attacks and a 521% growth in phishing attacks during the quarter.

What the company hasn’t provided investors with is updated financials and a full financial picture outside of the revenue forecast update. As ZeroFox provides more details about the upcoming expectations, investors can better judge the financial situation of the cybersecurity company.


The main investor takeaway is that ZeroFox has a compelling investment opportunity, but the company needs to clean up the financial picture before investors can get in on the action. ZeroFox is supportive of the company’s lower FY23 revenue targets, suggesting the stock is too downcast, but a better understanding of plans is needed before investing in this challenging environment.