McAfee (NASDAQ:MCFE) stock went public late last month. But, unlike other recent IPOs, the investment community was chomping at the bit to buy. Even with the boost seen in recent days, shares remain down from their $20 per share offering price.
If Wall Street is avoiding this, should you follow suit? Yes and no. On one hand, while this is a cybersecurity company, it’s not on the same level as the more high-flying names in this space. How is that? The company’s enterprise segment remains relatively small. And, with most of its sales coming from the declining antivirus software business, there really isn’t a growth story here.
That being said, one can argue the company has a shot of fixing this growth issue. With low expectations already baked into the share price, even a slight improvement could help move the needle.
Or can it? While its easy to put on rose-colored glasses, and assume this company will make the right moves, it’s tough to figure out ahead of time which turnaround plays will, well, turn around. And which ones will remain stuck in neutral.
On top of this is a high debt position, a product of its years under private equity ownership. Put it all together, and it makes sense why Wall Street wasn’t too interested in its IPO. And why you should exercise caution before diving into shares.
Why The MCFE Stock IPO Fell Flat on Its Face
Unlike some of the more successful 2020 IPOs, McAfee isn’t a fast growing “story stock.” It’s a mature company, in a mature industry. And, with that maturity comes consistent cash flow, it means anemic growth as well.
Why are growth prospects weak for this cybersecurity play? This industry may be growing, but there’s a big difference between this company, and the most dynamic plays out there, like Crowdstrike (NASDAQ:CRWD).
As InvestorPlace Markets Analyst Thomas Yeung discussed Oct 21, most of McAfee’s revenue comes from antivirus software sales. With this market in decline, McAfee needs to aggressively pivot towards the more lucrative enterprise market.
However, with the company’s existing Enterprise segment posting single-digit sales growth (and heavy losses), saying it has its work cut out for it is an understatement.
Sure, given the stock’s current low expectations, even partial success getting growth back on track could do wonders for MCFE stock. Yet, it’s still a bit early to say a shift to more high-growth cybersecurity markets is a catalyst just yet.
And, while there isn’t much in the catalyst department, there’s much to be concerned with in the risk department. With this company’s highly-levered balance sheet, even a slight deterioration from where things stand today could mean further declines from today’s prices (around $17 per share).
Private Equity Debt Could Be an Issue
As mentioned above, this newly-public company is weighed down by private equity baggage. What do I mean? About a decade ago, Intel (NASDAQ:INTC) acquired McAfee. But, with its acquisition a bust, the chip giant unloaded the company to private equity owners (TPG, Thoma Bravo, GIC) in 2017.
This private equity deal meant a levering up of the company’s balance sheet. Even with the IPO proceeds, the debt position remains large ($4.2 billion). Sure, right now the company generates more than enough cash flow to cover this obligation.
But, what if McAfee’s stable profits start to deteriorate? Highly levered, losses are going to be more pronounced . The result? Shares could continue falling, to prices significantly lower than where they trade today.
Sure, there’s no guarantee this will happen. The antivirus software business may be in long-term decline. But, overall sales climbed nearly 9% in the first half of 2020. Yet, with novel coronavirus tailwinds playing a role in this sales boost, who’s to say we’ll see similar performance in the coming quarters?
With questionable potential for gains (due to weak sales growth), coupled with high debt, I don’t blame Wall Street for avoiding MCFE stock.
Wait For A Catalyst (or Lower Prices) Before Diving into McAfee
This “also-ran” cybersecurity company may have an ubiquitous brand name. But as a great investment opportunity? The verdict’s still out. Sure, the company could make an aggressive pivot into faster growing segments of the cyber industry.
But, until we see some action, this remains a potential catalyst, not an actual one. Coupled with the considerable debt load, which could weigh down the stock further if performance deteriorates, and it’s clear this isn’t the most compelling stock out there to buy.
So, what’s the play? Take a wait and see approach with MCFE stock. Waiting for a catalyst to show up, or for prices to reach a more reasonable entry point, makes more sense than diving in today, and hoping for the best.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.