Cybersecurity is front of mind for many corporate executives right now as their business operations become more intertwined with the digital world. Technologies like cloud computing have delivered significant benefits, but they also leave companies exposed to malicious attackers around the clock.
In October of last year, consulting firm McKinsey & Company published a report warning that companies weren't investing enough in cybersecurity. According to the firm's estimate, the corporate sector will collectively spend about $189 billion on cyber protection in 2023, but it should be spending as much as $2 trillion.
That gap creates a substantial opportunity for cybersecurity software providers, particularly those developing proactive tools designed to protect against modern-day threats. Tenable (TENB 1.34%) is one of them; it's a leader in vulnerability management and serves over 43,000 organizations worldwide. The company is valued at just $5.5 billion right now.
Here's why it's positioned to benefit from the corporate spending gap on cybersecurity.
Offering a diverse portfolio of cybersecurity products
As the threat landscape expands, cybersecurity providers are racing to expand their product portfolios to keep up. Tenable's flagship platform is Nessus, the leading vulnerability management tool in the industry with more than 2 million individual downloads. It protects against over 78,000 common vulnerabilities and exposures, which is more than any of its competitors.
Nessus is an important on-ramp for enterprises into the Tenable universe, because while it's a broad-based platform, the company also offers a diverse portfolio of industry-specific products. It has developed cybersecurity software for the automotive industry, government, banks, and retailers (to name a few). And Tenable doesn't just offer them vulnerability management -- it has also developed products for cloud security, identity security (zero trust), and application security.
Last year, the company launched Tenable One, which combines five of its leading products into one simple solution, designed to give organizations a unified view of their attack surface. Packaging its products together gives the company an opportunity to capture more revenue from customers; an organization using Tenable's cloud security and vulnerability management, plus two products from another provider, might choose to migrate to Tenable One to simplify its security stack.
Tenable raised its revenue forecast for 2023
Investors punished Tenable stock following its first-quarter financial results because the company adopted a pessimistic tone and reduced its 2023 revenue forecast. But thanks to its $195 million in revenue for the second quarter (ended June 30), which was above the high end of its $191 million forecast, Tenable readjusted its full-year guidance higher once again.
The strength was partially driven by an acceleration in the number of Tenable customers spending at least $100,000 per year. The company added 63 of them in Q2 -- more than double the number it added in Q1 -- taking the total to 1,507. It highlights the growing demand for advanced cybersecurity software among larger, more complex organizations.
Tenable's Q2 results are especially impressive, considering it has been carefully managing costs. While the company grew its revenue by 19% year over year, this gain was on the back of just a 10.6% increase in its marketing spending, a 4.4% increase in research and development, and a drop in general and administrative (staffing) costs.
Since Tenable had more money flowing in while growing its costs at a slower pace, it managed to reduce its net loss by 42% year over year, to just $15.9 million.
Why Tenable stock is a buy now
McKinsey believes cyberattacks will cause a whopping $10.5 trillion in damage every year from 2025 onward. If the firm is correct, that number will have tripled over the course of a decade (since 2015), and it's unlikely to stop growing. Cyber protection is no longer a luxury, it's a necessity, because the cost of not having it is multiples higher.
Last year, Morgan Stanley surveyed leading chief information officers inside some of the world's largest companies, who indicated cybersecurity software would be the last expense they'd be willing to cut, even in the event of a recession.
Tenable told investors it expects to generate as much as $791 million in revenue this year. For context, the company believes the opportunity in its corner of the cybersecurity market will be worth $25 billion by 2025. But as mentioned, McKinsey points to a $1.8 trillion spending gap across the industry.
The disparity between the firm's estimate and Tenable's estimate is caused by very low penetration in key segments. For example, McKinsey believes companies are spending less than 5% of what they should be on cloud security, and as penetration increases, so should Tenable's own estimates about the size of its opportunity.
In any case, the cybersecurity industry's performance will be robust, no matter the broader economic circumstances in the coming years, which makes Tenable stock a great bet given its leadership position in areas like vulnerability management.
