Tenable's (TENB +1.68%) stock price has risen nearly 30% over the past 12 months as the cybersecurity company has impressed investors with its robust sales growth, expanding margins, and rising profits. Let's discuss three compelling reasons to buy Tenable -- as well as one reason to sell it -- to see if this under-the-radar cybersecurity stock is still worth buying today.
1. A proactive way to counter cyberattacks
Tenable's paid platform, Nessus Professional, scans a company's entire infrastructure -- including operating systems, on-premises software, cloud services, and Internet of Things (IoT) devices -- for exploitable vulnerabilities like misconfigured software, outdated applications, weak passwords, and network flaws. It also provides a free version for home users.
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That proactive approach differs from other traditional cybersecurity services that reactively scan a company's infrastructure for existing threats. Tenable claims that "old way" of dealing with threats is "no longer enough" to counter a new generation of cyberattacks, which poke and prod for a wide range of vulnerabilities across a company's network.
A lot of large companies agree with Tenable's view. More than 30,000 customers, including over half of the Fortune 500 and 30% of the Global 2000, now use its services. That massive footprint gives Tenable a major advantage against its rivals in the vulnerability assessment solutions (VAS) market, which include Rapid7 (RPD 1.56%), Qualys (QLYS 1.09%), and BGC Partners' GFI Software.
2. Robust growth rates
Tenable's revenue rose 24% to $440.2 million in 2020, then grew 21% year over year to $253.4 million in the first half of 2021. It expects its revenue to rise 20%-21% for the full year.
Analysts expect its revenue to rise 20% this year and 19% next year. Tenable wasn't meaningfully affected by the pandemic, since cybersecurity services remained essential throughout the crisis. It expects its future growth to be driven by more enterprise and U.S. government deals, as well as the expansion of its subscription-based cloud platform Tenable.io and its new unified risk-based exposure platform Tenable.ep.
3. Expanding margins and rising profits
Tenable's non-GAAP gross margin held steady at 84% in 2019 and 2020, which indicated it had plenty of pricing power in the VAS market. Its operating margin also rose from negative 12% to positive 6% as it reined in its spending. As a result, it generated a non-GAAP net profit of $20.8 million in 2020, compared to a net loss of $40.5 million in 2019.
In the first half of 2021, Tenable's non-GAAP gross margin dipped one percentage point year over year to 82%, but its non-GAAP operating margin jumped from negative 1% to positive 10%. Those expanding margins enabled it to generate a non-GAAP net profit of $24.9 million, compared to a net loss of $4.1 million in the first half of 2020.
Tenable expects its non-GAAP net income to rise 39%-59% for the full year. Analysts expect that figure to rise 47% this year and 29% next year. The company expects its stabilizing cloud infrastructure and R&D costs to offset the other investments related to the expansion of its ecosystem.
The one reason to sell Tenable: Its valuation
Tenable has secured a strong position in a niche market, it's growing rapidly, and its adjusted profits are soaring. It's also surpassed Wall Street's top- and bottom-line expectations every quarter since its IPO more than three years ago.
But Tenable's stock also trades at about 130 times forward earnings and 10 times this year's sales -- which indicates a lot of growth is already baked into its stock price.
However, its stock is still reasonably valued relative to those of its peers. Rapid7, which isn't profitable yet, is expected to generate 27% sales growth this year and trades at 13 times that estimate. Qualys, which is firmly profitable but growing at a much slower rate than Tenable and Rapid7, trades at 35 times forward earnings and 11 times this year's sales.
The strengths support its valuation
Tenable isn't profitable on a GAAP basis, and its stock looks a bit expensive, but I believe its strengths easily outweigh its weaknesses. The company might be less exciting than its higher-growth peers, but it's still a promising play on the growing cybersecurity sector, which shouldn't be overlooked.
