CYBR is one of the lesser known IT security stocks in a very hot sector. It did pick up notoriety on its huge run in February, doubling in value in just a few weeks. The stock retraced back to the $47.50 breakout level in March after significant insider selling this month. From Benzinga yesterday:
Cyberark shares are up more than 80 percent from its September initial public offering.
The stock popped in February with a favorable quarterly earnings report, but then dropped back sharply earlier this month, when a group of insiders sold four million shares at $51 a piece. The company currently has about 30.5 million shares outstanding.
Liani said risks to investors include sky-high Street expectations, a 63 percent stake still held by insiders following its recent sale, and the company’s premium stock price relative to its earnings.
Other factors on the cautionary side: the 41 percent of company revenue exposed to foreign exchange and market competition from vastly larger companies like International Business Machines Corp. (NYSE: IBM), Dell Inc. (NASDAQ: DELL) andCA, Inc. (NASDAQ: CA).
Given the relatively short history of the stock and the hot sector backdrop, the recent volatility is a bit less surprising:
Options pricing has been very expensive, with implied volatility in the 70 to 90 range, though that’s oftentimes been below realized volatility, which has spent a lot of time above 100 since the IPO:
Given the significant speculative interest in the name, I wanted to look at the possible risks and fundamental positives in CYBR.
First off, even though it’s in a hot sector (cyber security), its profitable and actually producing positive free cash flow. Excluding the IPO expenses, the company produced about $20 million in free cash flow in 2014. Of course, vs. a market cap of $1.5 billion, $20 million in free cash flow is less than a 2% free cash flow yield. At least it’s positive, which is better than many “hot” stocks in this market.
Moreover, revenue and cash flow growth has been 30-70% for the past 5 years, indicative of the secular trend in the industry and the company’s leadership therein. CyberArk attributes its focus on privileged account security as a key differentiator relative to competitors. Privileged account security essentially means paying ample attention to the potential touch-points into an enterprise security system, which are often the privileged accounts that have ubiquitous or near-ubiquitous access.
As for ownership, Goldman Sachs owns 19% of the company, a possible stamp of approval. Udi Mokady, one of the founders and the CEO since 2005, is also invested (owns 3% of shares). Given that insider ownership is still over 50% overall, the recent insider selling might be viewed in a more benign context, but it’d obviously be more positive if no insiders were selling.
On the negative side of the ledger, significant competition in the security space is a potential roadblock to growth in the future. In addition, it means that the company’s growth trajectory can change very rapidly.
On a valuation basis, the hot sector impact is one reason why the stock is valued more highly relative to a boring company. Analysts estimate only slight profit growth in fiscal year 2015, which is disappointing considering the prior pace of growth.
The sum of it is that CYBR is still much more a speculative stock play than a good story with a solid fundamental basis. Add to that the recent volatility, and this is a name that should probably be traded more on the technicals than the fundamentals, and with an understanding of the high risks involved at that.
We’re not getting involved just yet but is the trade we like if we eventually want to?
Bullish/stock alternative – Technically this stock looks decent near term as long as it can hold this recent $50 level. We don’t like buying the stock here for that reason but the for those that are inclined the options market provides a safer alternative. With no events in April and implied volatility probably a little residually elevated an in the money call fly in lieu of stock or simply as a bullish defined risk bet makes sense. The April 50/60/70 call fly is currently about 2.80 with the potential to make up to 7.20 if the stock is at $60 on April expiration. Intrinsically that’s an entry in the stock at 52.80 vs the current 53.75 price. It’s also only risking 2.80 vs risk to zero if the stock fails to hold these levels. There is a sacrifice that the profits trail off above $60 but that’s low probability.