Why Shares of Proofpoint Inc. Slumped Today

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.

What: Shares of cybersecurity company Proofpoint slumped on Wednesday after the company reported mixed first-quarter earnings. After tumbling 10% on Wednesday morning, the stock had mostly recovered by 2:15 p.m., down just 1% at that time.

So what: Proofpoint reported revenue of $57.76 million for the quarter, up 35% year-over-year and just barely higher than analyst expectations. Non-GAAP EPS came in at a loss of $0.09, a penny worse than what analysts were expecting. On a GAAP basis, EPS for the quarter was a loss of $0.56, bigger than the $0.39-per-share loss during the first quarter of 2014.

Proofpoint expects revenue for the full year to be in the range of $250 million to $252 million, representing revenue growth of about 29%. The company expects to be unprofitable on both a GAAP and non-GAAP basis during 2015, although it does expect to produce positive free cash flow for the full year.

Now what: Proofpoint's revenue growth is slowing, and the initial reaction from the market, sending the shares down as much as 10%, is likely a side effect of the company's nosebleed valuation. Proofpoint trades at about 11 times sales, a lofty figure for an unprofitable company expected to grow revenue by less than 30% this year.

There are many cybersecurity stocks trading at extremely high multiples of sales, so Proofpoint is certainly not alone on that front. But I don't see anything that really justifies this kind of valuation. Proofpoint looks like an extremely risky bet within a very hot, very overpriced industry.

The article Why Shares of Proofpoint Inc. Slumped Today originally appeared on Fool.com.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.