Digital Threats Will Create Lasting Cybersecurity Opportunities

Key Takeaways

• Expansion of Enclave and specialized features positions SideChannel to capture growing cybersecurity demand and enter higher-value client segments for improved margins.
  
• Enhanced operational efficiency and removal of capital constraints enable greater scalability, investment in growth, and improved future earnings potential.
  
• High client concentration, intense competition, temporary margin improvements, limited cash, and reverse stock split considerations signal volatility and challenges to sustainable growth and valuation.

Catalysts

SideChannel, Inc. identifies, develops, and deploys of v solutions in North America.

• SideChannel’s focus on expanding Enclave, its zero trust network solution, positions it to capitalize on increased enterprise and government demand for stronger cybersecurity due to growing digital threats and regulatory pressures—supporting sustained revenue and contract growth.
  
• The company’s advanced go-to-market strategy, strategic sales partnerships (such as with Koniag), and traction in public sector organizations provide a path to new, higher-value client segments, which is likely to improve both revenue growth and margin expansion over time.
  
• Continuous development and integration of new features (such as certificate and machine identity management) into Enclave enhances differentiation and value proposition at a time when cybersecurity clients require more specialized and automated solutions, potentially driving higher revenues and improved gross margins.
  
• Ongoing improvements in cost control, service delivery efficiency, and operational discipline, as evidenced by rising gross margins and reduced operating losses, are likely to translate into higher net margins and increased scalability going forward.
  
• Upcoming expiration of restrictive warrants will remove capital-raising constraints, allowing SideChannel to accelerate sales and product investment as needed, which can further fuel top-line growth and improve future earnings potential.

SideChannel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SideChannel's revenue will grow by 29.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -8.7% today to 14.6% in 3 years time.
• Analysts expect earnings to reach $2.4 million (and earnings per share of $0.0) by about May 2028, up from $-654.0 thousand today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.8x on those 2028 earnings, up from -17.7x today. This future PE is lower than the current PE for the US Software industry at 36.0x.
• Analysts expect the number of shares outstanding to grow by 2.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

SideChannel Future Earnings Per Share Growth

Risks

• The loss of several larger vCISO contracts in the prior fiscal year has negatively impacted trailing 12-month revenue retention, highlighting client concentration risk and revenue volatility, which may impede future scalability and consistent revenue growth.
  
• Ongoing competition from much larger, well-funded cybersecurity firms (e.g., Illumio, Zscaler, Check Point) in the zero trust and network segmentation market could drive price competition and commoditize SideChannel’s offerings, leading to margin compression and difficulty sustaining earnings growth.
  
• The company’s near-term operational improvements (better margins, lower losses) are partly driven by temporary factors such as annual contract renewals and disciplined cost controls, rather than robust top-line growth, raising concerns over the sustainability of future net margin expansion.
  
• Continued reliance on a limited cash position ($1.3 million) and the inability to raise additional capital due to restrictive warrants for another year may constrain SideChannel’s ability to aggressively invest in sales, marketing, and product development, potentially stalling revenue and earnings momentum.
  
• The need to consider a substantial reverse stock split and the recurrent shareholder authorizations for such a move suggest challenges with maintaining minimum share price levels and market perception, which may signal financial instability or hinder future capital raising, negatively impacting overall company valuation.

Valuation

• The analysts have a consensus price target of $0.23 for SideChannel based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $16.3 million, earnings will come to $2.4 million, and it would be trading on a PE ratio of 29.8x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $0.05, the analyst price target of $0.23 is 78.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.