Please ensure Javascript is enabled for purposes of website accessibility

Up 100% in 3 Years, How Much Higher Can CyberArk Stock Soar?

By Leo Sun – May 15, 2020 at 12:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Israeli cybersecurity company faces fresh challenges this year, but it still dominates its niche market while generating stable profits.

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?

Security software running on a tablet.

Image source: Getty Images.

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.

A hooded hacker reaches out into a web of network connections.

Image source: Getty Images.

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.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends CyberArk Software. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

CyberArk Software Ltd. Stock Quote
CyberArk Software Ltd.
CYBR
$149.94 (0.52%) $0.78
Check Point Software Technologies Ltd. Stock Quote
Check Point Software Technologies Ltd.
CHKP
$112.02 (-0.76%) $0.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.