Cybersecurity firm Imperva (NASDAQ:IMPV) recently slashed its second-quarter sales guidance due to extended sales cycles and the smaller size of larger purchases. The company now expects sales to rise only about 8% for the quarter that ended June 30, compared to its prior forecast for 22.4% to 24.3% growth. Analysts, on average, had expected 23.6% sales growth.

Shares of Imperva fell 5% in the two days following the July 11 announcement of preliminary Q2 results. The stock has stabilized since then, but it remains down about 33% over the past 12 months due to concerns about slower enterprise spending, competition, its lack of profitability, and lofty valuations. While those bearish arguments against Imperva are valid, investors should also take a contrarian view and see why this out-of-favor stock might bounce back and consider how much weight to give those potential catalysts.

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1. A market leader in a growing market

Imperva's core SecureSphere product is a web application firewall (WAF) that shields individual apps from specialized attacks. This is a small niche market, but Sandler Research forecasts it will grow at a compound annual growth rate of 17.3% between 2014 and 2019.

Last July, Gartner named Imperva the sole market leader in its "magic quadrant" for WAF vendors for the second straight year. Imperva's competitors in the WAF space include Barracuda Networks (NYSE:CUDA), Citrix (NASDAQ:CTXS), F5 Networks (NASDAQ:FFIV), and Fortinet (NASDAQ:FTNT).

However, Gartner reports that Barracuda can't match Imperva in security automation, Citrix doesn't offer competitive pricing, and F5 and Fortinet both offer WAFs with their application delivery controllers (ADCs). Neither F5 nor Fortinet focuses heavily on stand-alone "WAFs as cloud services," which Imperva does with its subscription-based Incapsula service.

Therefore, if Imperva maintains its market-leading position and the WAF market continues growing, its tepid second-quarter guidance could just be a bump in the road. Analysts don't expect Imperva's long-term growth to slow down anytime soon -- sales are still expected to rise 19% this year and 23% next year.

2. It could be acquired

There's also a strong chance that Imperva could be acquired for a premium to its current stock price, though it isn't wise to invest based on a hope for acquisition. In late June, activist investor Elliot Associates disclosed that it had a stake of almost 10% in Imperva. In the filing, Elliot called the stock "materially undervalued," and said it was talking to the company's management about pursuing "strategic and operational opportunities."

That implied one of two things would likely happen -- Imperva could dramatically cut costs to narrow its losses, or it could sell itself. In early July, Bloomberg reported that Imperva had hired investment bank Qatalyst Partners to help it explore a sale after receiving "unsolicited takeover interest." Imperva's CEO Anthony Bettencourt also isn't a stranger to big deals. Back in 2005, he orchestrated the sale of his former employer, Verity, to Autonomy for $500 million.

Imperva's market-leading WAF technology would be a good fit for many larger tech companies with growing security portfolios like Cisco and IBM. Its current enterprise value of $1.2 billion would also be a small price to pay, even after factoring in acquisition premiums. However, investors should remember that Barracuda tried to sell itself earlier this year for similar reasons, but no viable suitors emerged.

3. A potential short-squeeze

Short interest in Imperva rose nearly 29% in the two weeks ending on July 12, accounting for 9.4% of the overall float. That isn't a huge percentage of its shares, but short interest may have continued rising following its dismal guidance on July 11. Investors who short a stock make money if its price falls.

Investing in a stock with rising short-interest generally isn't a good idea, and investing in hopes of a short-squeeze driving up the price is also not a good idea, but a short-squeeze could occur in Imperva stock if potential suitors emerge or its second-quarter earnings report on Aug. 4 reveals more encouraging figures. A rising price on a heavily shorted stock can lead to an even higher price because people who shorted a stock borrowed shares to do so. They have to buy shares to return the ones they borrowed and if the price starts to rise, they could start buying, increasing demand. 

But should you invest in Imperva?

I'm personally not interested in buying Imperva, since its slowdown in sales growth and widening losses hint at plenty of downside risks ahead. There are also better niche cybersecurity plays like Cyberark, which dominates the market for privileged account management and is actually profitable on a GAAP basis. However, investors with an appetite for riskier cybersecurity plays might want to keep this stock on their long-term watchlists.

However, it could also be a bad idea to short Imperva right now, since the company is trying to sell itself while short-interest is rising.

 

Leo Sun owns shares of Cisco Systems and CyberArk Software. The Motley Fool owns shares of and recommends Gartner. The Motley Fool recommends Cisco Systems and CyberArk Software. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.