Why Shares of CyberArk Software Ltd Popped

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Continue Reading Below

What: Shares of cybersecurity company CyberkArk Software soared as much as 16% Tuesday on an upgrade to "outperform" (i.e., "buy") from broker William Blair. As of 3:10 p.m., shares were up more than 13%.

So what: William Blair's upgrade rests on two factors. One: Analysts Jonathan Ho and Jason Weidmoyer believe that the company's results will exceed their expectations. Two, they think the stock's current valuation offers an "attractive entry point:"

We believe CyberArk will continue to benefit from spending increases in the cybersecurity arena, which should lead the company to deliver results ahead of our and consensus expectations. We are upgrading the stock based on our belief that the valuation has pulled back to more reasonable levels (approximately in line with its revenue multiple at the time we initiated coverage on the stock) along with continued expectations for strong demand in a favorable cybersecurity spending environment.

Note that the analysts need to refer to a revenue multiple, as the current forward price-to-earnings multiple of 581, per Thomson Reuters, looks distinctly unreasonable (or unhelpful, in any case). Here is more on the William Blair analysts' view of the valuation:

We also continue to believe the company will likely benefit from acceleration in demand for its solutions, which should drive positive estimates revisions. In our opinion, the recent pullback in valuation since November has created an attractive entry point. We calculate the stock's enterprise-to-revenue multiple to be 9.5 times our 2015 top-line forecast and less than 8 times our 2016 top-line forecast, versus about 12.5 times at the time of our downgrade (relative to our 2015 forecast).

Continue Reading Below

An enterprise-to-revenue multiple in the same range of enterprise-to-cash flow multiples I'm used to seeing? Clearly, we're in hyper-growth stock territory.

Now what: In the wake of Edward Snowden's revelations concerning the extent of governments' spying on individuals and corporations and the high-profile hack of Sony Pictures Entertainment, cybersecurity is a hot area. However, CyberArk has a limited operating history (it went public last September) and investors ought to keep in mind this warning from the company's offering prospectus: "

We face intense competition from IT security vendors, some of which are larger and better known than we are, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

[Note: Those competitors include Dell, IBM, and Oracle.]

The market will get an opportunity to judge whether CyberArk's business is gaining momentum in two days' time, as the company reports its fourth-quarter and 2014 full-year results after Thursday's market close.

The article Why Shares of CyberArk Software Ltd Popped originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.