Lost in all of 2020’s hot initial public offerings (IPOs) was security software company McAfee (NASDAQ:MCFE). And to be fair, the word “initial” is slightly misleading in this case, as McAfee was a publicly traded company back in the 2000s but was subsequently taken private. In any case, it’s still the same consumer-facing personal security company that focuses on stopping viruses, malware, and other such threats. And now it’s back, trading on the Nasdaq as ticker symbol MCFE stock.
McAfee’s 2020 IPO has not been a rousing success. In fact, the IPO priced at $20, which was not at the higher end of the expected range. And since then, things have continued drifting lower — McAfee shares opened in the $18s and are down to $17 now. There clearly isn’t overwhelming demand for McAfee shares just yet. However, this lull could give traders a chance to buy in.
McAfee: How We Got Here
It’s important to realize from the jump that McAfee is not comparable to most hot cloud or Software as a Service (SaaS) stocks. That’s because McAfee is not a cutting-edge fast-growing company. At least not yet. Rather, for now, it’s one that has a large low-growth business largely riding off its entrenched brand. Thus, McAfee is already profitable and should be viewed on its present business as much as its future growth potential.
This is particularly true since McAfee has already been through various owners. Founder John McAfee long ago left the company. He’s pursued his wild life living in Belize and elsewhere, running for president, dodging tax evasion charges, and much, much more. Fortunately, he sold the company before all that drama really kicked off, and the McAfee company has had professional management in the intervening years. So while there may be a reputation there, don’t discount MCFE stock just because of the name.
Further to that point, in 2011, Intel (NASDAQ:INTC) acquired the McAfee software business. In 2017, they put it into a subsidiary and sold half to private equity. That stake has now arrived on the public markets via the IPO from this past month.
A Mature Stable Software Business
McAfee states that it helps protect more than 600 million devices. That’s a pretty impressive number. Skeptics may scoff that this is just a low-quality business that relies on getting onto people’s computers from being pre-loaded on newly built machines. However, contrary to that idea, McAfee has a good deal of higher-end customers such as government agencies as well.
This really gets to the bull case. McAfee can use its established presence and brand to start to add higher-value cyber-security and cloud services to its existing consumer-focused model. With steady cash flows, it gives McAfee the runway to build its business.
That said, bears can point to a distinct lack of success over the past decade. Revenues grew only 40% from 2011 to now, from $1.9 billion to $2.6 billion annually. That’s better than shrinking, of course, but it’s not an impressive result in a market as dynamic as security.
Still, you can easily make the case that McAfee struggled being part of a Goliath-like Intel. Now that it is independent again, McAfee should be able to more aggressively find and profit from emerging growth opportunities. And as it stands now, MCFE stock is going for just 3x sales. Given the slow growth rate now, that valuation makes sense. However, it shows the potential upside if McAfee’s efforts in higher-growth verticals pay off.
The Verdict on MCFE Stock
For many traders, McAfee (the company) is closely tied up with John McAfee, the larger-than-life personality. It’s totally understandable why people might be reluctant to buy MCFE stock given that backstory. However, if you look past the name, the actual McAfee company is a decent play on the ever-important security market.
Sure, there’s some possibility that McAfee will continue to just muddle along, barely growing as other security companies overtake it. However, McAfee is profitable and has a strong recurring revenue business. And now, free of Intel, it has the chance to make its own mark in high-value business segments. From a starting price/sales ratio of just 3x, MCFE stock is cheap enough to offer significant upside if the company manages any sort of acceleration in its operating results.
On the date of publication, Ian Bezek held a long position in INTC stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.