Cybersecurity companies have had a volatile year, but Symantec (NLOK 2.31%) investors endured unusually large swings even for this industry. The stock fell as much as 40% at one point in 2018 before bouncing higher, only to end the year back near its lows.
Below, we'll take a look at whether its latest decline means Symantec might be an attractive buy candidate heading into the new year.
Let's start with the good news, which includes the fact that Symantec's core security business appears to be on the mend. Sales passed $1.1 billion in the fiscal second quarter to edge past the guidance that CEO Greg Clark and his team issued back in August. Sure, its expansion rate trails that of peers like Check Point Software (CHKP 1.18%), which grew deferred revenue at an 11% clip last quarter. But Symantec's roughly stable order backlog adds weight to management's claim that sales growth will return in the back half of its fiscal year.
The company's finances are mixed, but solid overall. On the one hand, operating cash flow improved to $571 million over the past six months from $390 million in the year-ago period. However, Symantec is seeing profitability fall right now as costs fail to decline as quickly as sales. Its non-GAAP operating margin clocked in at 31.7% of sales last quarter compared to 34.1% a year ago. Check Point Software's comparable figure is 48%.
Big risks remain
Investors might forgive the relative underperformance in the business, especially considering that Symantec's stock is valued at a big discount to peers. You can purchase shares at about 2.5 times sales, after all, compared to Check Point Software's 8.7 times. Symantec's P/E ratio is sitting at around 10 today, or half of its rival's valuation and well below the broader market's valuation. That discount seems excessive if it's just a reflection of the company's market share struggles and weaker profitability.
Yet there's another issue hanging over the stock today. Symantec recently concluded a major accounting audit that resulted in the delayed filing -- and in some cases the restatement -- of several earnings reports including its fiscal 2018 annual report. That internal review is over, but the Securities and Exchange Commission (SEC) is still conducting a formal investigation of the software giant's auditing practices. "We could be required to pay significant penalties," as a result of any SEC action, executives warned in their latest 10-Q filing, "and become subject to injunctions, a cease and desist order, and other ... remedies."
Symantec voluntarily brought its accounting issues to the SEC's attention, and through performing its own audit and correcting the record it has made the right moves to speed along the conclusion of this challenge. Still, the ongoing investigation adds significant uncertainty to the stock. Combine that issue with the fact that Symantec hasn't yet demonstrated evidence of a sustainable operating rebound, and investors have good reasons to pass on this stock for now despite its relative bargain pricing. Symantec might navigate past both its accounting and operating issues in 2019, but until it does, there are other attractive options in the cybersecurity industry.