The Russell 2000 index features approximately 2,000 of America's smallest publicly listed companies. It delivered a strong gain of 10% in July, handily outperforming the S&P 500 index, which traded flat for the month.
Investors are anticipating up to three interest rate cuts from the U.S. Federal Reserve before the end of 2024, which could benefit small companies because they tend to rely on debt financing to fuel their growth more than their large-cap peers.
However, every major U.S. market index -- including the Russell 2000 and the S&P 500 -- is in the throes of a sell-off in August. That could spell an opportunity for long-term investors to buy quality stocks at a discount. Here's why small-cap cybersecurity powerhouse Tenable (TENB 0.23%) is one to consider.
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A leader in vulnerability management
Tenable specializes in vulnerability management, which is a proactive branch of cybersecurity that involves identifying weak points in a company's devices, networks, and operating systems, so they can be rectified before malicious actors exploit them. These tools are crucial for modern organizations with a growing digital presence, because they protect blind spots that might have otherwise been missed.
Tenable owns Nessus, which is the most accurate and the most widely deployed vulnerability management tool in the industry. It has become an on-ramp to a growing portfolio of other products Tenable offers, which includes cloud security, identity security, and a new tool called ExposureAI.
ExposureAI uses artificial intelligence (AI) to rapidly analyze security data to help managers make more informed decisions about their security posture. Tenable says it has the world's largest repository of exposure data, which includes a whopping 1 trillion unique threats and vulnerabilities, so ExposureAI has the potential to be faster and more accurate than competing products.
Tenable's entire suite of cybersecurity software products -- including ExposureAI -- is now available on a single platform called Tenable One. It's Tenable's attempt at "platforming" customers, which means to fulfill all of their vulnerability management needs under one roof. It can lead to more revenue per customer and a much greater lifetime value, as opposed to them only using one or two products.
"Platformization" is a key theme in the cybersecurity industry right now, especially among the leaders like Palo Alto Networks and CrowdStrike as they battle for market dominance.
Tenable continues to make progress at the bottom line
Tenable generated $221.2 million in revenue during the recent second quarter of 2024 (ended June 30), which was a 13% increase from the year-ago period. It was also comfortably above management's forecast of $218 million.
Tenable serves over 44,000 corporate customers, but 1,793 of them are spending at least $100,000 per year on its software. That figure was up 19% year over year, and it highlights how important vulnerability management tools are becoming to larger, complex organizations.
Tenable has a history of generating losses because it spends heavily on things like marketing (its largest expense) to acquire customers and fuel growth. But over the past year, the company has spent more prudently to improve its bottom line in the face of a challenging global economic climate.
During Q2, Tenable only increased its operating costs by 11.7% year over year, which included an increase of just 3.3% in its marketing spend. While the company still generated a net loss of $14.5 million, that was a slight improvement over the $15.9 million net loss it reported in the year-ago period.
On a non-GAAP basis (which excludes one-off and non-cash expenses like restructuring charges and stock-based compensation), Tenable actually delivered a profit of $38.1 million, which was a solid 45% jump from the same quarter last year.
Why Tenable stock is a buy now
Tenable has a market capitalization of just $4.9 billion, which is why it's in the Russell 2000 small-cap index. It's much smaller than the leaders of the broader cybersecurity industry like CrowdStrike and Palo Alto Networks, which are valued at $55 billion and $99 billion, respectively. Both of those companies are in the S&P 500 index.
Tenable stock is also significantly cheaper than both of those names on a like-for-like basis, as measured by its price-to-sales (P/S) ratio. Based on the company's trailing-12-month revenue of $852 million, its stock trades at a P/S ratio of just 5.7. That's more than a 50% discount to both CrowdStrike and Palo Alto:
Keep in mind, Palo Alto's revenue increased by just 15% during its recent quarter, so it isn't growing all that much faster than Tenable -- yet it trades at more than double the P/S ratio. Palo Alto is a fantastic company and I'm not suggesting it needs to fall in value. Instead, I think Tenable stock deserves to trade higher.
Tenable says its addressable market in the exposure management segment of the cybersecurity industry is worth $33 billion. Based on its current revenue, it has barely made a dent in that opportunity, which implies the company has plenty of growth left in the tank.
The broader stock market sell-off might be a great time for investors to buy into the Tenable story.
