Why has the Tesserent (ASX:TNT) share price dropped more than 50% in 2021?

Tesserent is in the boom industry of cybersecurity. We take a closer look at its recent activities.

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Tesserent Ltd (ASX: TNT) is the largest pure-play cybersecurity company listed on the ASX, but the Tesserent share price has been in decline of late. It’s shares have slumped from a 52-week high of 44 cents in January to today’s price of 21 cents. 

This amounts to a drop of more than 50% and while the fall can’t be attributed to one factor, it is worth taking a closer look at the recent activities of the company.

Acquisitions R Us

In a 2020 interview with the Australian Financial Review (AFR), Tesserent chairman Geoff Lord believed the company would be able to generate 25% of the growth needed organically, while the remaining 75% would come through acquisitions. Previously, Lord was the founder of the successful tech business, UXC.

True to his word, by December 2020, Tesserent had made five acquisitions including Ludus, Airloom, Seer, iQ3 and New Zealand’s Lateral Security. Additionally, Tesserent spent about $22 million on purchasing the managed security services business of Secure Logic.

Last month, Tesserent made further investments in cybersecurity startups TrustGrid and AttackBound. The purchase marks Tesserent’s intention to enter into a software-as-a-service (SaaS) based technology offering. According to the company’s announcement, the purchase was executed through a mix of $1.5 million in cash and $1.5 million in shares at a purchase price of $0.2345 per share.  

In most instances, debt is the price for growth, especially via an acquisition strategy. Consequently, as at the end of December 2020, Tesserent had $9.91 million of debt, up from$3.45 million a year ago.

Acquisitions are known to spook some investors. As with Tesserent, the nature of an acquisition transaction, is that the acquiring firm either pays in cash, and or issues equity, this dilutes the value of the existing shares.

…but everything is tracking nicely

Despite the drop in the Tesserent share price, the company’s latest quarterly report highlights an increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $1.7 million for the quarter. It also reported a 21.4% EBITDA increase quarter on quarter. The report has Tesserent targeting a $150 million turnover by 30 June. 

According to the business, it’s well placed to deliver on its acquisition strategy growth plans, with $7.7 million in available cash at the end of March. The report also states that it plans to increase its market cap from $200 million to $300 million-plus and become profitable by next year. 

Government and corporate tailwinds

Tesserent is also riding some government and corporate tailwinds.

Cyber ransomware attacks have become the grim reaper of Australian business. In March this year, the AFR reported more than half of Australian businesses were hit by attacks on their computer systems. Apart from disruption and repair costs to systems, 54% of businesses paid their attackers, but a quarter of those did not get their data returned.

In May 2021, ANZ institutional banking boss Mark Whelan told an annual banking summit (as quoted by the AFR): “The number of attacks had escalated during the pandemic to the point where it was receiving 8 to 10 million attacks a month”.

Tailwinds are coming from the government as well. In the recent 2021 budget, Prime Minister Scott Morrison announced $1.67 billion in existing defence funding would be spent over the next decade to boost cybersecurity capabilities.

It is also now mandatory for enterprises with $3 million of revenue or more to report cybersecurity breaches. The Australian Cyber Security Centre is projecting the cybersecurity industry to grow from $5.1 billion in 2019 to $7.6 billion in 2024. 

Additionally, a recent PWC survey found that 40% of Australian businesses plan to increase their cybersecurity resources over the next year.

According to Tesserent, it currently partners with 43 out of the top 100 companies on the ASX.

Tesserent share price snapshot

The Tesserent share price has dropped, but investors will no doubt be hoping it is on track to deliver on growth projections.

In the last 12 months, the Tesserent share price has increased by 215%, outperforming the S&P/ASX 200 Index (ASX: XJO) which delivered a 21.5% increase.

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Motley Fool contributor Frank Tzimas owns shares in Tesserent Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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