Does CyberArk Software Still Have Room to Run?

Shares of CyberArk (CYBR -1.01%) more than doubled over the past 12 months as the cybersecurity firm impressed investors with a string of earnings beats. However, CyberArk now trades at nearly 50 times this year's earnings after that rally, which is a high multiple relative to its forecast for an earnings decline. Should investors take profits in CyberArk, or does this cybersecurity stock still have room to run?

What does CyberArk do?

Unlike many other cybersecurity companies, which focus on blocking external threats with firewalls and threat prevention software, CyberArk focuses on stopping internal threats from corporate spies and careless or disgruntled employees.

Image source: Getty Images.

That approach made CyberArk a market leader in the niche market for PIM (privileged identity management) solutions. The global PIM market could grow at a compound annual growth rate of 32% between 2017 and 2023, according to Market Research Future, as enterprise customers tighten their security standards.

CyberArk now serves over 4,400 businesses, including over half of the Fortune 500 and more than 30% of the Global 2000. It's also consistently profitable on a GAAP basis, because the Israeli company doesn't pay as much stock-based compensation (9% of its revenue last quarter) as many of its Silicon Valley-based peers.

Check out the latest earnings call transcript for CyberArk.

How fast is CyberArk growing?

CyberArk splits its business into two segments: License revenues, which accounted for 61% of its revenue last quarter, and Maintenance & Professional Services revenue, which accounted for the rest. Here's how those two core businesses fared over the past year.

Year-over-year revenue growth. Source: CyberArk quarterly reports.

CyberArk's growth accelerated significantly during the fourth quarter on robust demand for its services across "all geographies", a number of "seven-figure" add-on deals, and the integration of its services into leading cloud platforms like AWS and Azure. CyberArk's revenue rose 31% to $343 million in 2018, and it anticipates 20%-21% growth in 2019.

Image source: Getty Images.

How profitable is CyberArk?

As stated earlier, CyberArk is profitable by both non-GAAP and GAAP metrics. Both figures accelerated significantly throughout 2018.

Year-over-year revenue growth. Source: CyberArk quarterly reports.

That growth can be attributed to its stronger sales growth and tighter control of its costs and expenses, which is reflected in the year-over-year expansion of its gross and operating margins:

Source: CyberArk Q4 earnings report.

CyberArk's non-GAAP net income rose 83% to $76.5 million in 2018, and its earnings grew 78% to $2.06 per share. However, it expects its EPS to decline 4% in 2019 as it expands its ecosystem and workforce as it ramps up its promotional efforts.

It expects to book a large portion of those charges in the third quarter, due to seasonal employee expenses and its marquee Americas customer event. But looking further ahead, analysts expect CyberArk's earnings to return to double-digit growth in 2020.

The tailwinds, headwinds, and valuations

Two of CyberArk's main PIM rivals, CA Technologies and BeyondTrust, were acquired last year. Broadcom (AVGO 3.84%) acquired CA last November to diversify its business away from semiconductors, and BeyondTrust was acquired by Bomgar.

The integration of CA and BeyondTrust's services into these larger portfolios is disrupting the PIM market and making CyberArk look like a simpler streamlined choice. FBN Securities believes that the shakeup is "accruing to CyberArk's advantage," but I think it might eventually become a headwind if Broadcom and Bomgar bundle their PIM services with other products.

CyberArk's stock isn't cheap relative to its growth potential. It posted impressive growth in 2018, but 2019 looks tougher, and a market downturn could torpedo high-multiple tech stocks. I admire CyberArk's core business, but I don't think investors should chase the stock at these levels.