Not all tech IPOs have done well this year. Just take a look at McAfee (NASDAQ:MCFE). This cybersecurity company went public in late October. But MCFE stock has fallen over 12% since then.
Now, McAfee is certainly a trusted brand. The company got its start back in 1987, when computer engineer John McAfee founded the operation. While antivirus software was already available, his innovation was to leverage online networks for distribution. The result was staggering growth.
The company went public in the early 1990s and then merged with Network General. And by 2011, McAfee was sold to Intel (NASDAQ:INTC). But being part of a larger organization probably stunted the growth because it was not really strategic to the chip business. Thus, in 2017, Intel sold a 51% interest to private equity giant, TPG Capital. Thoma Bravo was a minority investor in the transaction.
OK so, what now? Might there be an opportunity for MCFE stock? Or should investors be cautious?
Well, let’s take a look.
Background of MCFE Stock
McAfee develops security software systems for consumers, small businesses, large enterprises and governments. The technology foundation relies on an extensive sensor network that monitors endpoints, gateways and clouds in IT systems. The McAfee system processes huge amounts of real-time data to detect anomalies and outliers. There is also use of sophisticated technologies like artificial intelligence (AI) and machine learning.
In terms of the consumer business, McAfee’s software protects more than 600 million devices. And as for the enterprise segment, the company has about 78% of the Fortune 500 as customers.
But since TPG Capital and Thoma Bravo made the acquisition, there have been some major changes to McAfee. There has been ramping of investments to bolster the partnerships for the consumer business and a restructuring of the enterprise portfolio. For example, there was the exit of the businesses for network firewalls, email security and vulnerability management. Instead, McAfee has been focused on a device-to-cloud strategy that is based on the MVISION platform. This is a comprehensive system for threat defense, management, automation and orchestration across devices, networks, clouds and even on-premise environments.
A key for MCFE stock, of course, is the market opportunity. And it is enormous. There are a myriad of trends that are driving growth. Just some include: the transition to remote work that has been accelerated by the Covid-19 pandemic; the continued rise of cybersecurity risks; the growth in digitization, such as with the adoption of sophisticated smartphones; and the move toward cloud computing. According to McAfee’s own estimates, the addressable market is roughly $30.4 billion this year and is projected to grow at a compound annual growth rate of nearly 8% through 2024.
“The cybersecurity industry is known for its resiliency, so it is no wonder it is one of the few relatively untouched by the wrath of COVID-19,” said Trevor Daughney, who is the VP of product marketing at Exabeam. “With the shift to remote-first working, companies have found it increasingly difficult to identify and mitigate threats on individual employees’ computers. The increase in phishing scams, insider threats, credential-stuffing attacks and ransomware in the wake of the pandemic has forced organizations to rely on security solutions and partners to stay protected.”
The Bottom Line
The market for security software is intensely competitive. There are large players like Microsoft (NASDAQ:MSFT), Trend Micro and Broadcom’s (NASDAQ:AVGO) Symantec. There are also fast-growing earlier-stage companies, such as Crowdstrike (NASDAQ:CRWD) and Zscaler (NASDAQ:ZS).
Another issue is that the consumer market is highly commoditized. The result is that margins have remained fairly low.
But despite all this, MCFE stock still looks attractive. The company’s development of its MVISION Cloud looks spot on and there will likely be acquisitions to bolster the company’s offerings.
The valuation on MCFE stock is also attractive, with the shares trading at about 2.6 times revenues. Then there is the strong cash flow generation. For fiscal 2019, the EBITDA (Earnings Before Interest, Taxes, Debt and Amortization) came to nearly $800 million. So all things considered, MCFE stock does look like an interesting play on the growing cybersecurity market.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.