Shares of Symantec (NASDAQ: SYMC) dropped off a cliff on May 11 after the cybersecurity giant delivered a double whammy of bad news. The company's fourth quarter numbers easily beat analyst estimates on the top and bottom lines, but it provided soft guidance of fiscal 2019 and disclosed an internal investigation into past financial reports.
But after that big sell-off, Symantec trades at just 14 times this year's earnings and 12 times next year's earnings. Should value-seeking investors looking for a cybersecurity play consider buying Symantec at these depressed levels?
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What went right for Symantec
Before we discuss the bad news that crushed Symantec's stock, we should examine some positive figures from its fourth quarter report. Symantec's revenue rose 4% annually to $1.23 billion during the quarter, beating estimates by $40 million. Symantec's previous five quarters of double-digit sales growth were inflated by its acquisition of Blue Coat in Aug. 2016.
During the conference call, Symantec CEO Greg Clark attributed its fourth quarter growth to steady demand for its Enterprise Security and Consumer Digital Safety products. Its Enterprise Security revenues rose 1% annually, while its Consumer Digital Safety revenues climbed 6%.
Symantec won over the biggest customers in the enterprise market with its Integrated Cyber Defense Platform, which offers a cost-effective, end-to-end security solution. It saw more than 100 deals greater than $1 million during the quarter, along with a "large number of deals" exceeding $5 million. It also closed an "eight-figure deal with a large global professional services company."
On the consumer front, Symantec expanded beyond its core Norton AntiVirus product with comprehensive security solutions that bundle together malware, identity protection, and privacy protection products. Clark noted that the business had room to grow, since "40% of US citizens" were affected by a cybersecurity issue last year.
Symantec's adjusted deferred revenue, a key indicator of forward demand, also rose 21% annually -- with 34% growth in Enterprise Security and 3% growth in Consumer Digital Safety. All these figures indicate that Symantec's growth will remain on track as businesses and consumers take cyber threats more seriously.
Its non-GAAP operating margin expanded 980 basis points annually to 36.5% thanks to higher sales growth and better cost controls. As a result, its non-GAAP net income jumped 68% to $310 million, or $0.46 per share, beating estimates by seven cents.
What went wrong for Symantec
Symantec's fourth quarter numbers looked solid, but its guidance came up short. It expects between -1.7% to 1.1% sales growth for 2019, while analysts anticipated 1.9% growth.
On the bottom line, it expects its non-GAAP earnings to slide between 2.4% and 11.2% due to its divestiture of Website Security and related PKI solutions, as well as higher investments aimed at boosting its revenue growth. Analysts had anticipated 6.5% earnings growth for the year.
Those numbers look dismal compared to the company's cybersecurity peers. For example, Symantec's bigger industry peer Check Point Software (NASDAQ: CHKP) is expected to post 2% sales growth and 5% earnings growth, yet its stock trades at just 17 times this year's earnings.
Investors might have forgiven Symantec's soft guidance, but then it dropped a second bomb on investors: Its board has launched an internal probe into its finances and voluntarily alerted the SEC about the investigation. Symantec stated that the investigation was launched in response to "concerns raised by a former employee," and that it had "retained independent counsel and other advisors to assist it in its investigation."
Symantec didn't say much more about the investigation, but warned that its past results and guidance "may be subject to change based on the outcome of the Audit Committee investigation," and that it was "unlikely" that the probe would conclude in time for it to file its 10-K for fiscal 2018. That probe cast a dark cloud over its already gloomy outlook for the year, which exacerbated the stock's big drop.
Is this a broken stock or a broken company?
Value investors often look for "broken" stocks, which are oversold due to short-term concerns, instead of broken companies, which face long-term challenges. Unfortunately, Symantec is the latter right now -- its core business faces growth issues this year, and the internal audit is deeply troubling. Therefore, investors should stick with safer bets like Check Point until the clouds over Symantec dissipate.
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