Big cybersecurity providers have been in command of the spotlight, but there's a smaller niche of the industry that often gets overlooked: Identity access and privileged access management (IAM and PAM, respectively).
There's good reason this segment of the greater digital security market gets overlooked by many investors. One of the leaders in the space, Okta (OKTA +0.33%), has left a lot to be desired. By contrast, its smaller competitor CyberArk Software (CYBR +0.00%) has been far more stable, and just made a sizable move to consolidate market share to itself.
Is CyberArk stock a better buy than Okta right now?
NASDAQ: CYBR
Key Data Points
Identity security is more important than ever
There's no shortage of data security breaches being reported these days. Stealing big company data and reselling it or holding it for ransom is in itself a pretty lucrative (and of course illegal) business scheme. Oftentimes, the vector of attack that's easiest to exploit is human user access credentials, aka passwords and other such security measures -- or lack thereof.
That's where IAM and PAM (PAM being a subset of the broader IAM market, or identity access) come in. These are software tools that enable an organization to make sure only authorized individuals are able to access specific organizational services (like email, for one) and information (sensitive and private data, like how a manufacturing operation works).
Okta has long been the leader in this space. But interestingly, due to a number of factors including lackluster profit margins, ample stock-based compensation paid to management and employees that dilute shareholders, and a couple of security incidents, it's CyberArk that has been the better-performing stock.
This timeline goes back to 2017, when Okta had its IPO. CyberArk has actually been public since 2014, and boasts total share price returns of over 700% since then.
Data by YCharts.
CyberArk has been a steady growth stock, and it looks to continue its pace with a new merger. Private equity software specialist Thoma Bravo will be selling one of the cybersecurity companies it has a stake in called Venafi.
Thoma Bravo made a strategic growth investment in Venafi in 2020, at the time valuing the software security business for $1.15 billion. Now CyberArk is buying Venafi for $1.5 billion -- $1 billion in cash, plus another $540 million of new CyberArk stock (which means Thoma Bravo will be a sizable CyberArk shareholder after the merger is complete).
Thoma Bravo has been active in the last couple of years, scooping up small and financially distressed security software upstarts. Cybersecurity industry consolidation is underway, and CyberArk gets a chance to bolster its market share with the Venafi purchase.
As identity security importance rises, adding Venafi to the mix could help CyberArk keep its positive momentum rolling. Venafi addresses machine identities (everything from robotic factory equipment to software-based bots that help with company automation), a growing need as artificial intelligence (AI) creates new cyberattack risks organizations need to manage.
NASDAQ: OKTA
Key Data Points
Is CyberArk stock a good deal?
CyberArk only had $1.08 billion in cash and short-term investments on hand as of early 2024, and debt of $573 million. It will likely raise a bit more debt to pay the approximate $1 billion in cash to Thoma Bravo for Venafi, so the balance sheet won't be so squeaky clean in the quarters immediately following the tie-up.
However, CyberArk will land itself a solid asset in Venafi, as the smaller private company's revenue was $150 million and growing (a sizable addition to the just over $811 million in trailing-12-month CyberArk revenue). Venafi is also profitable, so it will provide an immediate boost to CyberArk's own profit margins and free cash flow generation.
Data by YCharts.
CyberArk is now valued at an enterprise value (or EV, market cap minus cash plus debt) of $9.9 billion as of this writing. That means it trades for roughly 10 times sales post-Venafi purchase, and just under 90 times trailing-12-month free cash flow. Granted, we don't know yet how the profitable Venafi asset will be integrated. Free cash flow could be in for a significant increase.
CyberArk has my attention. I don't think it's necessarily a best buy in cybersecurity right now, but this is an interesting business to keep tabs on. Okta shareholders might want to do the same.
