CyberArk (CYBR -2.39%) recently posted its fourth-quarter earnings. The cybersecurity company's revenue rose 11% year over year to $144.5 million, while adjusted net income fell 14% to $32.6 million, or $0.82 per share.
Those headline numbers looked solid as they beat the analyst consensus, but CyberArk's guidance was mixed. Management expects flat to low single-digit revenue growth in the current quarter. Adjusted earnings should come in between a loss of $0.03 per share and a profit of $0.07. Both of those estimates fell short of analysts' expectations.
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For the full year, CyberArk expects revenue to rise just 4% to 7%, but on the bottom line, earnings could tumble nearly 80% year over year.
This messy outlook might cause scare off some investors, but I believe CyberArk is still a sound investment for four simple reasons.
1. A leading niche player
Unlike cybersecurity companies that focus on shielding networks from external threats, CyberArk's tools block internal threats from corporate spies and disgruntled employees.
Gartner has repeatedly dubbed CyberArk the leader of the PAM (privileged access management) market, and it currently serves over 6,600 businesses worldwide -- including over half of the Fortune 500 and more than a third of the Global 2000.
The global market for PAM solutions could still grow at a compound annual growth rate (CAGR) of over 30% between 2020 and 2026, according to Market Research Future. That's why it came as no surprise when CEO Udi Mokady declared that CyberArk would continue to benefit from "strong industry tailwinds, including increasing awareness of privileged access as a primary attack vector."
2. Its earnings downturn should be temporary
Last May, CyberArk acquired Idaptive, a start-up that secures network endpoints with "zero trust" tools, for $70 million. That purchase, along with the expansion of its lower-margin cloud-based services, weighed down its gross and operating margins throughout the year.
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Gross margin shrank from 85.6% in 2019 to 82.2% in 2020, while operating margin tumbled from 14.4% to just 1.3%.
Management expects that margin pressure to persist throughout 2021 with higher cloud infrastructure investments squeezing its gross margin, and elevated research and development, sales, and marketing expenses throttling its operating margin.
However, CyberArk believes these investments will pay off as its clients pivot from its on-premise services, which are offered via perpetual licenses, toward its cloud-based services -- which are easier to scale and generate more stable recurring revenue.
That ongoing transition will also help CyberArk keep pace with other cybersecurity companies like FireEye and Palo Alto Networks, which both pivoted away from on-premise appliances toward cloud-based services in recent years, in addition to CrowdStrike, which provides cloud-native security services.
3. Growth in annual recurring revenue
CyberArk's emphasis on cloud-based services and recurring subscriptions boosted its annual recurring revenue (ARR) 43% to $274 million, or 59% of its top line, in 2020.
The company expects recurring cloud-based bookings to account for 55% of its new license bookings in 2021, up from about 50% in 2020. That shift will inevitably weigh down its near-term profitability, but it could set the foundations for much stronger revenue and earnings growth over the next few years.
4. The stock is still reasonably valued
CyberArk's stock might initially seem expensive at over 300 times this year's earnings. However, its recent earnings declines are inflating that P/E ratio, and it still looks reasonably valued relative to its peers at 13 times sales.
By comparison, Palo Alto and CrowdStrike trade at about nine and 43 times this year's sales, respectively. Furthermore, CyberArk's low enterprise value of $5.5 billion still makes it a compelling takeover target for larger companies that want to instantly establish their presence in the niche PAM market.
The bottom line
CyberArk isn't a high-growth market darling like CrowdStrike, but it generates consistent growth with a wide moat. Its near-term earnings growth might seem tepid, but it could emerge from its cloud-based transition as a much stronger company. Investors who buy the stock now and wait for those investments to pay off should be well-rewarded over the next few years.
