MSFT - Jamf Holding: Strong Market Position With Upside Catalyst (Earnings Growth)

2023-08-27 23:27:17 ET

Summary

• Jamf Holding is recommended as a buy due to its growth potential alongside Apple products and expected earnings growth acceleration.
• JAMF is the industry leader in Apple Enterprise Management, offering cloud-based software for the seamless connection, management, and security of Apple products.
• The company's strong partner ecosystem, including integration with Microsoft software, diversifies its business risk and provides added value to customers.

Overview

My recommendation for Jamf Holding Corp. ( JAMF ) is a buy rating, as I expect JAMF to continue growing as it continues to grow alongside the strength of Apple ( AAPL ) products. The upside catalyst for driving the share price up is earnings growth acceleration, which JAMF should start to experience in the coming quarters.

Business

JAMF stands as the industry leader for Apple Enterprise Management. Their cloud-based software platform is a leading vertically-focused Apple infrastructure and security solution on a global scale. JAMF facilitates the seamless connection, management, and safeguarding of Apple products, applications, and corporate assets within the cloud system, all without direct device interaction. Through JAMF's software, Apple devices can be swiftly deployed, configured automatically, and personalized from initial activation, while also being consistently administered throughout their lifespan.

Vertically-focused Apple Infrastructure And Security Platform Of Scale

JAMF holds a unique position as the sole specialist in Apple infrastructure and security platform provider globally. Their growth has been shaped by focusing on becoming the premier enterprise solution for Apple products and services. Additionally, their collaborative partnership with Apple, along with their amassed technical knowledge and proficiency, equips them to promptly harness and expand the potential of Apple products, operating systems, and services. This synergy and cooperation enable them to offer full support for new Apple innovations and OS releases right upon their release by Apple. Hence, JAMF growth is, in a way, tied to the growth and health of the Apple ecosystem. In my opinion, the strength of Apple lies in their dominant "closed" ecosystem and consumer mindshare. The community that Apple has fostered through the years has continuously "pushed" users to buy the latest product, or extend their Apple usage to other parts of their lifestyle (iPod > iPhone > Macbook > TV > Watch). This article also supports my point that Apple has a very strong consumer mindshare. As such, I believe JAMF is well positioned to ride this wave.

Being the exclusive software platform with a shrewd focus on the Apple ecosystem and enriched by their close relationship with Apple and their vast technical understanding of Apple offerings, JAMF has effectively established itself as the predominant name in the segment of Apple Enterprise Management solutions. I believe this gives them a very strong advantage in building brand reputation, which drives customer loyalty. Once customer loyalty has been established, especially in the enterprise software management market where the substitution cost is high and often difficult to execute, customer retention will come naturally.

Strong Partner Ecosystem That Also Offers Integration With Microsoft Software

In order to diversify the business risk of being solely tied to Apple, JAMF also possesses an extensive collection of open APIs that enable their customers to seamlessly incorporate and expand their current software systems with third-party applications. Their API repository encompasses a multitude of integrations and solutions, all accessible through their JAMF Marketplace. JAMF's capability to offer numerous APIs can be attributed to their adeptness in cultivating enduring and robust relationships with both developers and solution partners.

A notable example is the integration with Microsoft ( MSFT ). Collaborative efforts with Microsoft have yielded solutions that enhance the integration of the Apple ecosystem within enterprises that predominantly utilize Microsoft technologies. By developing an API that enables Apple devices to interact with Microsoft solutions, companies can establish smoother and more interconnected user experiences. One instance could involve users accessing Microsoft Office files using their Apple devices or employing their Apple products to manage Microsoft Teams sessions. This is especially powerful in this market, as many enterprises around the world rely heavily on Microsoft software for their business operations. By allowing seamless integration between Apple's products and 3rd-party software, especially Microsoft products, as part of their Apple enterprise management service, JAMF is offering their customers' great value proposition. More importantly, it does not force the user to choose one or the other, thereby, reducing the friction of adopting JAMF services.

In addition, by establishing an API that enables the integration of Apple products with Microsoft solutions, companies can circumvent the need to create their own specific connections. This has the potential to result in time and cost savings, particularly for businesses less experienced in Apple development. JAMF's robust synergy with third-party partners such as Microsoft allows them to access the entire potential addressable market effectively and seamlessly.

Strong Support From JAMF Nation Ecosystem

JAMF Nation has the largest online assembly of IT professionals. This dynamic community operates as a capable and responsive hub, facilitating engagement and interaction with both existing and potential customers. It achieves this by addressing inquiries related to Apple and JAMF implementations. Through open forums, individuals can freely exchange their experiences, insights, and expertise connected to JAMF's offerings. This collective reservoir of knowledge not only benefits customers but also exemplifies the practical efficacy of JAMF's services.

By facilitating discussions, providing answers to queries, and offering valuable insights, JAMF showcases its profound expertise within the industry. This positions the company as a trustworthy brand, thus bolstering its credibility and reputation as the preeminent leader in Apple enterprise management.

Moreover, content users often disseminate their positive encounters with the brand on the forum and beyond, effectively acting as advocates and propelling positive word-of-mouth. The open forum equally serves as a direct conduit for customers to contribute feedback, recommendations, and innovative ideas, underscoring the company's regard for customer opinions and fostering heightened customer loyalty.

All in all, I believe this community, JAMF Nation, serves as an efficient channel to acquire customers and also plays a pivotal role in providing insights, suggestions, and concepts that significantly shape the direction of JAMF's product development trajectory.

2Q23 Results

Overall sales were up 16.8%, recurring sales were up 19.4%, and annual recurring revenue was up 17.6% to $547.8 million; 79% of ARR came from management solutions, while 21% came from security solutions. Total devices managed increased to 31,300,000, while other key performance indicators remained stable or improved. Notably, ARR per device increased for the 9th straight quarter, reaching $17.50. Net revenue retention has dropped from 115% to 109% since 3Q22, representing the most prominent negative this quarter. Net revenue retention has been on the decline, in my opinion, as a result of the macro, which has caused customers to reconsider their hiring plans and slow down the rate at which they are adding new devices. Until the macroenvironment improves, however, I anticipate this figure to level off and remain unchanged. That said, the number of active customers rose to 73,500, an increase of 1,000 from 1Q23 and 6,500 from the previous year, which is a positive takeaway. At the profile line, reported gross margin came in at 81.9%, up 70 bps. The rise in non-GAAP operating margins to 4.3% can be directly attributed to the rise in gross margins. Despite a decline in FCF performance, JAMF's balance sheet cash profile remains strong, with $211.5 million in cash at quarter's end.

Valuation And Risk

According to my model, JAMF is valued at $21 in FY24, representing a 27% increase. This target price is based on my growth forecast of continued momentum from management's FY23 guidance (implying 16% growth). While I believe there is room for growth to accelerate, I acknowledge that JAMF is unlikely to grow as fast as in the past given the saturation of Apple products. Incremental growth here relies on market share gains, which are not as easy as winning the hearts of new users. Nonetheless, mid-teen growth is likely plausible as it is half the rate of previous growth rates. Earnings, on the other hand, should see very strong growth acceleration as they come off a small base with margin expansion. I used the consensus FY25 estimate as a benchmark for margin.

JAMF is now trading at 32x 2Y forward earnings. I used the 2Y forward as a benchmark because it better reflects the medium-term earnings outlook and also because I am valuing based on FY25 earnings. Suppose JAMF stays at this multiple, which I think it should given the strong earnings growth profile, the stock should see decent upside from here.

The potential drawback here is that JAMF's current product suite helps businesses and schools make the most of their Apple devices by filling the gap in device management that Apple left. However, Apple may one day provide these missing goods and services on its own, cutting out the middleman entirely.

Summary

In conclusion, I believe JAMF presents a compelling investment opportunity. As the leader in Apple Enterprise Management, JAMF's unique position within the Apple ecosystem, its strong partnership with Apple, and technical expertise enhance its growth prospects. The company's close integration with Microsoft software further expands its reach and value proposition. JAMF Nation, a vibrant community of IT professionals, contributes to brand awareness and loyalty. While growth may moderate due to market saturation, JAMF's earnings acceleration potential remains robust.

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