CyberArk's (CYBR 0.52%) stock recently tumbled after the Israeli cybersecurity company posted its first-quarter earnings. Its revenue rose 11% annually to $106.8 million, narrowly beating estimates by $0.2 million. Its adjusted net income dipped 9% to $19.6 million, or $0.50 per share, but it still beat expectations by $0.13.
CyberArk's headline numbers looked stable, but its forecast for roughly flat revenue growth with a 41%-71% drop in adjusted earnings spooked investors. It also withdrew its guidance for the full year in light of the COVID-19 pandemic.
CyberArk's investors clearly weren't pleased, but the stock remains up nearly 100% over the past three years. Should investors lock in their profits now, or ride out the near-term volatility for bigger long-term gains?
CyberArk's growth trajectory
Many cybersecurity companies focus on external threats, but CyberArk protects internal networks from corporate spies and disgruntled employees. When a threat is detected, CyberArk's software locks down compromised networks and tracks the intruder.
CyberArk enjoys a first mover's advantage in the niche privileged access management (PAM) market. It currently serves over 5,300 companies, including more than 50% of the Fortune 500 and 30% of the Global 2000. It has also acquired smaller companies, including Agata, Conjur, Vaultive, and Idaptive, to expand its ecosystem and customer base in recent years.
CyberArk went public in late 2014. Its revenue rose 56% in 2015, 35% in 2016, 21% in 2017, 31% in 2018, and 26% in 2019. It also remained profitable on a GAAP basis -- which was rare for a high-growth cybersecurity company -- thanks to its conservative use of stock-based compensation.
Why is CyberArk's growth slowing down?
CyberArk relied on acquisitions, an expansion of its sales team, and the introduction of new services to maintain its momentum over the past few years. But the COVID-19 crisis disrupted that flow in the first quarter.
CyberArk witnessed a "rapid decline in the business environment" in March as the pandemic spread, and some of its deals were either canceled or downsized near the end of the quarter. Its exposure to the troubled energy, retail, transportation, and travel sectors, which together accounted for 15% of its total bookings in 2019, exacerbated the pain.
As a result, CyberArk's licensing revenue grew less than 1% annually to $51.7 million. But on the bright side, 79% of that licensing revenue came from add-on services, up from 63% in 2019. Subscription revenue also accounted for another 10% of its licensing revenue, up from 4% a year earlier.
Those sticky expansion rates indicated CyberArk was squeezing more revenue from its existing clients. Its maintenance and professional services revenue also rose 23% to $55.2 million, which partly offset its weaker growth in licensing revenue.
Meanwhile, CyberArk's operating expenses rose 20% annually during the quarter as it aggressively increased its headcount. That hiring spree, which expanded its workforce 24% annually, is a sign of strength -- but it could also dent its operating margins as its core business faces tougher pandemic-related headwinds.
Can CyberArk weather the COVID-19 downturn?
During the conference call, CyberArk CFO Josh Siegel pointed out that the company's gross margin remained high (at 84% in the first quarter), and most of its operating expenses were related to its increased headcount -- so it still had the "flexibility to adjust our hiring to better align with the top-line as we move through the year."
In other words, CyberArk can hire fewer new employees, or even prune its workforce, if its revenue growth doesn't improve. But for now, CyberArk seems confident in its long-term growth, and newer products like Alero -- which allow remote workers to access a company's resources through CyberArk -- could strengthen its ecosystem through the downturn.
But does the stock still have room to run?
Analysts expect CyberArk's revenue to rise 10% this year as its earnings decline about 26%. Investors should take those forecasts with a grain of salt, but its stock looks a bit pricey at over 40 times forward earnings. By comparison, Wall Street expects CyberArk's bigger Israeli peer Check Point (CHKP -0.76%) -- which trades at just 17 times forward earnings -- to grow its revenue and earnings 1% and 4%, respectively, this year.
But CyberArk is arguably a more exciting investment than Check Point, a mature player in the firewall space that shed 5% of its value over the past three years. CyberArk doesn't face much competition in its growing niche, its ecosystem is well-suited for both on-site and remote workers, and it's consistently profitable. 2020 might be a rough year for CyberArk, but I believe its stock should gradually rise and outperform those of many of its industry peers over the next few years.