It’s Time to Drop Barracuda Networks Inc (CUDA) Stock

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Preventing cyber criminals and hackers from stealing sensitive data has been a profitable industry for many years. But thanks to the weak results announced on Tuesday by Fortinet Inc (NASDAQ:FTNT), cybersecurity investors are feeling less secure. Although Barracuda Networks Inc (NYSE:CUDA) avoided a similar fate Wednesday, CUDA stock, which has risen 30% in three months, has outperformed its own potential.

It's Time to Drop Barracuda Networks Inc (CUDA) StockTo say it another way: CUDA stock has become overbought. And investors would do well to take profits after Wednesday’s 9% jump and wait for the pullback in Barracuda before buying back in.

CUDA closed at $25.47 Wednesday, up 9.17%. The stock has skyrocketed 37% year-to-date, outperforming not only the 3.8% rise in the S&P 500, but also the 7% rise in the iShares North American Tech-Software ETF (NYSEARCA:IGV).

On Wednesday, Barracuda Networks posted adjusted second-quarter earnings of 21 cents per share on revenue of $87.9 million, topping analysts’ estimates on both measures. Investors cheered the fact that the cloud-based cybersecurity provider’s earnings-per-share rose of 110% from the same period last year, while revenue grew 12%. From my perspective, these numbers only met expectations. And looking ahead, Barracuda Networks will now have a much more difficult time beating its comparable.

Consider, CUDA stock wasn’t cheap before Wednesday’s results and it isn’t cheap now. The stock is priced at 44 times fiscal 2016 estimates of 57 cents per share, compared to a forward price-to-earnings ratio of 17 for the S&P 500 index. And based on the fiscal 2017 estimate of 64 cents per share, the P/E falls to only 38. This means there’s tons of expected growth priced into Barracuda stock.

And here’s the thing: Assuming CUDA does earn 64 cents per share next year, this would translate to year-over-year growth of only 12%. So why pay almost three times the valuation of the S&P 500 index for only a fraction of the growth?

By comparison, Cisco Systems, Inc. (NASDAQ:CSCO), which operates in the same industry, is priced at just 11 times fiscal 2017 estimates with earnings projected to grow at 6%. At the same time, Cisco pays a 26-cent quarterly dividend that yields 3.35% annually, versus no dividend for Barracuda Networks.

While CUDA does boast a portfolio of products and services that protect businesses from data breaches, revenue in the last two quarters has grown by an average of only 11%, down from 20% growth in Q4 2015 and down from an average of 16% growth in the last four quarters. And with fiscal 2017 revenue of $374 million expected to grow at only 7%, Barracuda Networks will have to squeeze as much margin as possible from the revenue it generates to meet its earnings targets.

The Bottom Line for CUDA Stock

The pricey valuation in CUDA stock is one thing, but the trend in Barracuda Networks’ revenue is something to keep an eye on. And at a forward P/E of almost 40, based on the fiscal 2017 estimate of 64 cents per share, there’s too much at stake to assume that things can get any better for Barracuda stock. With CUDA stock up 36% YTD and crushing the market, pat yourself on the back. But now’s the time to take profits and move on to the next great idea.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/10/drop-barracuda-networks-inc-cuda-stock/.

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