After Symantec (NASDAQ:SYMC) first disclosed its accounting problems in May, the stock quickly tanked and fell below $20 a share. And prior to its earnings report issued last week, it looked as though the stock would hold the $20 threshold.
That hope evaporated when the company reported poor first quarter results and lowered guidance in the second quarter. Now with a forward P/E of 11, SYMC stock is well below fair value.
Symantec forecast full-year revenue would fall below the $4.83 billion consensus estimates and in the range of $4.67-$4.79 billion. For the second quarter, revenue will not meet the $1.19 billion expectations. Instead, revenue will be in the range of $1.13-$1.16 billion.
CEO Greg Clark reasoned the miss is due to large, multi-platform sales taking longer to close. The lower enterprise billings, which dropped from $646 million last year to $556 million in the quarter, could persist if business drags again in North America.
Despite the revenue miss, Symantec’s cash flow from operations rose to $334 million, up from $213 million, sequentially. ARPU will grow, thanks to Symantec’s Consumer Digital Strategy.
If the large deal closings did not get delayed, the company would have reported solid revenue growth from its Integrated Cyber Defense platform. But due to the shortfall, sales fell 20% from last year to $111 million.
Growth From Cloud Space
Symantec, like other software companies, namely Adobe (NASDAQ:ADBE) with its Creative Suite and Microsoft (NASDAQ:MSFT) and Office365, is lowering the barrier of adoption by porting its products to the cloud.
Cloud Proxy, CASB, and Data Protection, as well as multi-factor authentication, are some of the parts of the security stack that will ease customer adoption of Symantec products to the cloud.
In the first quarter, Symantec signed a contract with a multinational food and beverage company that adopted its Cloud Proxy. The user base of nearly 100,000 is proof that more enterprise customers will sign deals of that size in the coming quarters.
Yet, with SYMC stock trading at just 11 times forward earnings, markets have little faith that the anti-virus and cybersecurity specialist will win more large-size deals.
Valuation on SYMC Stock
According to Tipranks, the average price target on SYMC stock is $21.62, or upside of nearly 11% from its recent price of around $19.50. Conversely, a 10-year revenue exit model would peg the company’s fair value as close to $30 a share, or upside of over 50%.
To get the stock close to the fair value in the $30 range, Symantec clearly needs better revenue growth and higher EBITDA as a percentage of revenue. And after the lowered forecast, investors will have to wait beyond this year before expecting such lofty profit margin growth.
For the fiscal year 2019, operating margin will reach no higher than 30%, compared to the previous 30-32% forecast.
In fiscal 2020, Symantec forecasts profit margin improving to the mid-30% range. This view is supported by expectations of sales from both the Enterprise Security and Consumer Digital Safety segments picking up sharply. In the short term, Symantec will cut headcount globally by 8% and take a $50-million charge to reach those longer-term targets.
Takeaway on SYMC Stock
Symantec came up short in its revenue numbers this quarter when renewable billings and sales from new business did not meet expectations. This cost the company $110 million in business. Yet the 7% drop last week on top of the 43% drop from yearly highs prices in the downside risks.
SYMC stock could even become a takeover target. Its market cap of $12.7 billion could attract a mega-cap company that is looking for growth in the software space and willing to pay under three times sales.
Disclosure: The author does not own shares in any of the companies mentioned.